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