Chrysler Files for Bankruptcy

(page 2 of 2)

Treasury officials said the U.S. will guarantee Chrysler new-car warranties. The government added that GMAC Financial Services will work with Chrysler dealers to write car loans for new-car buyers. The government plans to give GMAC some capital to make more loans.

That will keep Chrysler running, but the course of the bankruptcy case is still largely unknown and at the mercy of a judge. Treasury officials say they will file Chapter 11 and use a so-called 363 sale to separate the good and bad assets of Chrysler. That means Fiat can pick and choose what it wants.

Certain car and truck model lines, brands, or factories could go. The namesake Chrysler brand is under review and could be shut down, though no decision has been made, say sources close to Chrysler. Treasury says it will thin out Chrysler's 3,100 dealers and reduce the number of sales outlets. But parts makers are left wondering what products and factories will remain.

Dealers could fare very badly in Chapter 11. The automaker is likely to try to thin underperforming outlets in suburban and urban markets that have too many Chrysler-Jeep-Dodge dealers. The hope is to make the remaining dealers more profitable and reduce the costs of supporting more dealers than are needed for Chrysler's current 12% market share. "There will be a lot of pain at the dealer level for both Chrysler and GM as these restructurings play out," says Earl Hesterberg, CEO of Group 1 Automotive (GPI), which owns several Chrysler-Jeep dealerships. That said, the CEO added: "Although the bankruptcy process will present some more challenges for dealers like us, we are pleased to see a definitive plan for the survival of Chrysler."

Parts Makers: Collateral Damage?

Former Chrysler President Thomas T. Stallkamp, a partner at private equity firm Ripplewood Holdings, which controls parts maker Metaldyne, is wondering about the fate of one of the company's brake-and-chassis plants in Indiana, for instance. Chrysler buys 75% of the parts made in the plant. Stallkamp suspects Chrysler may ditch some model lines, which means his plant and those owned by other parts makers could be left underutilized.

"There are a gazillion unanswered questions," Stallkamp says. "We have no idea what Fiat will take out of this."

The Obama Administration has loaned money to keep parts makers flush. And Stallkamp says Metaldyne and others parts companies had already shortened payment terms so they wouldn't lose accounts receivable in bankruptcy. But he worries about lost sales volume as Chrysler shrinks even more.

Another big question is whether the bankruptcy can be finished in 30 to 60 days, as the Treasury Dept. thinks. Financial firms holding Chrysler debt could hold things up in court, says Douglas Bernstein, a partner at bankruptcy law firm Plunkett Cooney in Bloomfield Hills, Mich. "The smaller, minority debt holders have a strategy in these cases to be as big a pain in the neck as possible to get the other stakeholders to make them go away."

The smaller debt holders had hoped, once the larger banks agreed to discount their holdings, to cut a better deal. Says Bernstein: "It is very doubtful that the debt holders who held out will do better in Chapter 11."

Now that they're headed for court, if the judge looks to be favoring the complaints of smaller debt holders, there will be some pressure on the larger banks to go ahead and buy them out to speed things up, says Bernstein. The only real card the smaller debt holders have is to chew up time and try to make the Chapter 11 drag out.

"A Shell of Itself"

For Chrysler, any delay could be deadly. Sales already are down 46% this year, and the stamp of bankruptcy won't raise the confidence level of car buyers. And despite all the cost concessions, it's not clear if the company will be profitable once it emerges. CEO Nardelli had already cut deeply over the past year, after all, but was unable to find a break-even point.

Fiat's smaller cars won't be here for almost two years. And smaller cars command thin profit margins in the U.S. But analysts say that the tie-up could make up what Chrysler lacks. The company's core minivan, Dodge Ram pickup and Jeep SUV lines match up with Fiat's passenger car business. LaSorda said the tiny Fiat 500 (a competitor to BMW's Mini) could be built in North America.

"Fiat has a good collection of four-cylinder cars that could sell here," says Gary Dilts, senior vice president of J.D. Power Global Automotive (which, like BusinessWeek, is owned by The McGraw-Hill Companies): "The 500 is a killer in urban markets." But between now and then, Dilts said, Chrysler needs the car market to rebound. "In a 10 million car market, nothing survives," he said.

For now, though, the government has given Chrysler a chance to survive. "It's a horrible day," Stallkamp says. "It's bittersweet because at least the name will survive. But the company is a shell of itself."

Welch is BusinessWeek's Detroit bureau chief. Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

Business Exchange

Track and share business topics across the Web.