Chrysler Files for Bankruptcy

The historic move hinges on a fast trip through court, billions more in federal dollars, and an alliance with Fiat

By David Welch and David Kiley

In a move that will send shock waves through the auto industry, the U.S. Treasury Dept. put Chrysler into bankruptcy on Apr. 30 in an effort to restructure the company for long-term survival.

The filing in a U.S. bankruptcy court in Manhattan marks the first-ever bankruptcy for a major U.S. car company. Chrysler—founded in 1925 by Walter Chrysler—came close to filing in 1979 but was rescued at the last minute by a federal loan package. Today's filing came after a month of negotiating with Chrysler's lenders and the United Auto Workers. While Treasury and Chrysler management were able to win agreement on big concessions both from the UAW and more than half of Chrysler's creditors—who represent 75% of the $6.9 billion in debt—the obstinacy of a handful of lenders kept the company from getting all of its restructuring done out of court.

Chrysler's bankruptcy—which federal officials hope can be wrapped up in a month or two—has massive implications for reshaping the U.S. auto industry. The company will continue to shrink in size and reduce its debt load. That will clear the way for Chrysler to firm up its alliance with Italy's Fiat (FIA.MI), which eventually will take a 20% stake in the company. Chrysler has a chance to survive with a partner that can make small and midsize passenger cars.

Chrysler CEO Robert Nardelli told employees in an e-mail message that most of the company's manufacturing operations will be "temporarily idled effective Monday, May 4, 2009." He added: "Normal production schedules will resume when the transaction is completed, which is anticipated within the next 30 to 60 days. Hourly employees will receive unemployment benefits, as well as supplemental pay that will amount to most of their base wages."

Nardelli plans to leave once Chrysler emerges from bankruptcy and head back to former owner Cerberus Capital Management as an advisor. Chrysler Co-President Tom LaSorda plans to retire before then. Co-President James Press was unclear about staying with Chrysler, saying only that he is focused on getting the company though bankruptcy. Nardelli said he will stay on to manage the bankruptcy process, but that's it. "We'll come out a more vibrant, lean and agile company," he said.

Presidential Swipe at Hedge Funds?

Another key is the message Treasury and President Barack Obama sent to Wall Street as the federal auto task force races to restructure General Motors (GM). GM also needs creditors—in its case, thousands of bondholders who own $27 billion in debt—to take stock for their notes. The message: Treasury is clearly not afraid to use bankruptcy to get the job done.

Says one senior Treasury official: "What happened today is a reflection of the President's willingness to make tough decisions."

In a noon ET speech, President Obama made a strong statement about the three creditors who held out in the Chrysler talks, perhaps even sending a message to GM's bondholders as the government and GM work to reduce their debt. "A group of investment firms plus hedge funds decided to hold out for a tax-funded bailout," Obama said. "I don't stand with those who held out while others made sacrifices."

In a statement published on The Wall Street Journal Web site, the recalcitrant bondholders said they sought an accommodation with the government.

"Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler's rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM's unsecured bondholders are receiving a far better recovery than we are as Chrysler's first lien secured lenders," the group said.

The statement added: "Our offer has been flatly rejected or ignored. The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well-being of the company's employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades."

Canada-U.S. Partnership

Treasury is putting yet more taxpayer dollars at stake to ensure the car companies emerge intact. In Chrysler's case, the government will provide $3.5 billion in debtor-in-possession financing to keep Chrysler in operation during court proceedings and up to $4.5 billion in exit financing when it's done.

Treasury officials also said the Canadian government will put in $1 for every $3 from the U.S., measured in Canadian currency. When Chrysler emerges, the UAW's retiree health-care trust, called a Voluntary Employee Benefits Assn., will own 55% of the company. The U.S. and Canadian governments together will own 10% of the company, and Fiat will hold 20%. As Fiat brings in new models and technology to Chrysler, its stake could rise to 35%.

The Italian partner cannot take a controlling stake until all government debt is paid off, Obama said.

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