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Some lenders refuse offer to reduce debt, leading to Chapter 11 bankruptcy filing. But Chrysler will remain in business and completes deal with Fiat.

Chrysler LLC filed for bankruptcy Thursday. But a deal has been reached to combine the company with Fiat in order to allow Chrysler to stay in business.

The bankruptcy filing, which was made in federal court in New York, comes after some of Chrysler’s smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.

In remarks at the White House, President Obama said that the bankruptcy filing is not a failure for the company but “one more step on the path to Chrysler’s revival.”

Obama vowed the bankruptcy process would be quick, efficient and controlled. A senior administration official predicted it would be completed within 30 to 60 days. The combination with Fiat is also due to close during that period of time.
According to government officials, a new company will be formed that will buy the assets of Chrysler – its plants, brands, land, equipment, as well as its contracts with the union, dealers and suppliers – from the bankruptcy court.

The company’s liabilities and an unspecified number of Chrysler’s 3,300 dealerships which now sell the Chrysler, Dodge and Jeep brands will be left behind in the bankruptcy court.

Administration officials said the Treasury Department will provide Chrysler with about $8 billion in loans on top of the $4 billion in loans it has already received to get it through bankruptcy.

Officials said $3.3 billion of the new loans will be used to fund operations during bankruptcy, while the remaining $4.7 billion will allow Chrysler to function normally once it exits bankruptcy. In addition, the Canadian government will loan the companies $2.7 billion to help support Chrysler’s Canadian operations.
While an administration official promised there will be no immediate job cuts for the company’s 39,000 employees or plant closings, Chrysler announced that most manufacturing operations will be temporarily shut down on Monday, May 4. Normal production is not due to resume until the transaction with Fiat is completed.

But some Chrysler plants, including truck assembly and stamping plants in Warren, Mich., shut down earlier than scheduled on Thursday. Following the bankruptcy filing, some suppliers worried about being paid stopped shipping parts to the plants.

“I was hoping we could get through this unscathed,” said Gene Behme, a production technician at the Warren stamping plant as he left work about an hour early. “I’m disappointed. I would like to keep working. Hopefully we’ll come through stronger.”

Chrysler President Tom LaSorda would not say how many plants would shut down early or how many suppliers had cut off shipments on the bankruptcy news.

“Hopefully most of the suppliers will continue to supply us,” he said.

Most of Chrysler’s hourly workers will receive about 80% of their normal pay during the shutdown under unemployment benefits and supplemental pay in the union contract.

The employees whose jobs may be most immediately in danger are the 3,400 workers of Chrysler Financial, which provides loans to Chrysler customers and its dealers.

That unit is essentially going out of business. As part of the reorganization, lending will now be provided by GMAC, the finance arm jointly owned by General Motors (GM, Fortune 500) and current Chrysler parent Cerberus Capital Management. (Cerberus will end up with no stake in Chrysler once the bankruptcy is complete and is in the process of cutting its stake in GMAC to less than 15%.)

Some of the 140,000 employees at Chrysler’s network of dealers could also be at risk. Chrysler CEO Robert Nardelli said that the reduction in the network of 3,300 dealers would not be a “catastrophic” but that it would be “noticeable.”

Nardelli, who joined Chrysler two years ago, will leave after Chrysler emerges from bankruptcy and completes the alliance with Fiat.

Fiat will be calling more of the shots after the combination as the deal calls for it to provide “management services” to Chrysler.

A successor for Nardelli will be named by the new Chrysler board of directors, which will have four members named by the Treasury Department, three named by Fiat, and one each by the UAW and the Canadian government.

Once the deal closes, Fiat will examine the cost structure of Chrysler to find additional savings. Fiat has promised to use Chrysler’s existing plants to build the small cars it now sells in Europe for the U.S. market.
Chrysler faced a midnight Thursday deadline from the Treasury Department to reach deals with creditors who had loaned the company about $7 billion.

But the troubled 85-year old automaker was able to avoid liquidation thanks to the deal with Fiat, concessions from the United Auto Workers union and agreements by major lenders to cut Chrysler’s debt.

The UAW announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified the agreement reached between the company and union leadership on Sunday night.

As a result of that deal, the UAW will own 55% of Chrysler. Fiat will own a 20% stake with the option of increasing it to 35%. The U.S. government will own 8% and Canada will have a 2% stake.

Major banks such as Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) agreed to reduce their portion of $7 billion in secured loans to a more manageable $2.25 billion, but talks with smaller lenders broke down Wednesday when they refused to meet a deadline set by the Treasury Department to accept pennies on the dollars for loans to Chrysler.

Nonetheless, the fact that Chrysler will not have a disorderly bankruptcy may prevent a rash of failures across the auto supplier industry that had the potential to disrupt production at other automakers.

Chrysler owes its suppliers about $7 billion, according to the latest figures available from the company. Some of those suppliers could still be hurt by the bankruptcy filing.

And the auto industry’s woes are far from over. Sales have plunged due to the global recession and tighter credit. Major automakers are expected to report dismal April sales on Friday.

Chrysler has been among the hardest hit. It has fallen behind Toyota Motor (TM) in sales, and is close to being overtaken by Honda (HMC) for the No. 4 spot for U.S. sales.

In addition, GM faces a government-imposed deadline to restructure by the end of May or it too could be forced into bankruptcy.

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The major banks that loaned Chrysler LLC about $7 billion have agreed to significantly reduce that debt, according to the Treasury Department, a move that could save the struggling automaker from having to file for bankruptcy later this week.

“The agreement from Chrysler’s principal banks is an exceptional accomplishment in line with the President’s firm commitment that all stakeholders sacrifice to make this deal succeed,” said an administration official Tuesday.

The company still needs to win a rank-and-file ratification vote Wednesday of a tentative labor deal reached with leadership of the United Auto Workers union late Sunday, and wrap up an alliance with Italian automaker Fiat before the Thursday deadline set out by the federal government. But the deal with lenders was generally thought to be the most difficult hurdle the company had to clear in the final week before the deadline.

If Chrysler escapes bankruptcy, that would be a rare bit of good news for the struggling auto industry. Many had predicted that a Chrysler bankruptcy would lead to the company’s eventual liquidation. That could have caused even more problems throughout the industry, as a closure could have led to widespread job losses at dealerships and bankruptcies throughout the auto parts industry.

Being privately held, Chrysler has not released its financial results for recent years. But the company needed $4 billion in federal loans earlier this year to avoid filing for bankruptcy protection, and it has asked for an additional $6 billion in federal help.

The Treasury Department’s auto industry task force found in late March that Chrysler was no longer viable as a stand-alone company and said it needed to reach a deal with Fiat, as well as with its creditors and unions, in order to receive more assistance and avoid bankruptcy. Treasury gave it until the end of April to accomplish those goals.

General Motors, which has also received federal help to avoid bankruptcy, has until the end of May to reach deals with its creditors and unions. It proposed a plan Monday that would give its creditors a 10% stake in that company, while giving the government and the union up to an 89% stake. Details of the Chrysler debt reduction deal were not immediately available. The Washington Post reported that creditors agreed to cut the $6.9 billion in secured loans owed to them to $2 billion in return for an equity stake in a reorganized  Chrysler.

As recently as last week, the major banks that had loaned money to Chrysler, including Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), were reported to be demanding 65 cents of every dollar they were owed, along with a large equity stake in the company. The Treasury Department was reportedly offering only 22 cents on the dollar and a small equity stake.

Neither of those banks nor Chrysler had any immediate comment on the debt restructuring deal. The banks were arguing they would do better than that if the company was forced into bankruptcy and its assets were liquidated, because the loans were secured by the company’s assets, such as plants, land and equipment.

But some experts, including credit rating agency Standard & Poor’s, have suggested that the banks could end up with virtually nothing if the government agreed to fund Chrysler’s operations during a bankruptcy reorganization or liquidation, which would put the government in line to get the proceeds of any asset sales.  New owners would face same challenges The banks are likely to get only a small equity stake in a reorganized Chrysler. The union-controlled trust funds which will assume the responsibility for retiree health care are to receive a 55% stake in the company, according to a source familiar with the agreement, while Fiat is to receive a 35% stake. Treasury and the bank lenders would receive a 10% stake.

Cerberus Capital Management, which bought 80% of Chrysler from German automaker Daimler in 2007, would no longer own a stake in the company according to the reports. Daimler agreed to give up its final 20% stake in Chrysler on Monday, and make $600 million in contributions to its pension funds over the next three years.

If Chrysler avoids bankruptcy, it still remains to be seen if the company can return to financial health anytime soon. Sales at Chrysler LLC, which includes the Chrysler, Dodge and Jeep brands, fell nearly 46% from year-ago levels in the first quarter.

And the company is only a fraction of its former self. It has about 39,000 U.S. employees, only about 40% of the total it had at the beginning of the decade, and has fallen behind Toyota Motor (TM) in sales. It is also close to being overtaken by Honda (HMC) for the No. 4 spot in the U.S. market. – CNN

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General Motors Corp on Monday offered its final plan to reorganise outside bankruptcy by slashing bond debt, cutting over 21,000 more US jobs and emerging as a nationalised automaker under majority control by the US government.

GM chief executive Fritz Henderson said the automaker would file for bankruptcy protection if an offer to exchange bonds for company equity failed to cut US$27bil in bond debt by about 90% or other changes faltered.

Analysts doubted the debt exchange offer would succeed, setting up GM to restructure in Chapter 11.

GM’s bondholder’s blasted the terms of its debt-exchange as a back-room deal designed to protect the interests of its major union the United Auto Workers, a group that campaigned for President Barack Obama in last year’s election.

Representatives of the bondholders said GM and the Obama administration were gambling on a risky and “legally questionable” strategy for a company that once ranked as an icon of American industrial and economic strength.

The White House said on Monday the US government had no desire to run a domestic automaker despite the potential controlling interest.

“We strongly back an auto industry that we believe can and should be self reliant,” White House spokesman Robert Gibbs told reporters. “It is not our desire to either own or run one of the auto companies.”

GM’s new strategy, which will also jettison the Pontiac brand and shut down production of Saturn brand cars this year, underscored how quickly and far it has fallen since last summer when executives, including Henderson, were insisting that the automaker could restructure under a programme of “self help.”

Separately, Chrysler lenders were expected to receive a new offer from the US Treasury as early as Monday in the wake of cost-cutting deals the US automaker has reached with unions in the United States and Canada.

Chrysler faces an April 30 deadline to reach a deal with creditors and cement an alliance with Italy’s Fiat SpA and continue to receive US government emergency support.

The automaker was working “diligently” to complete the Fiat deal and restructure its business by the deadline and maintain government emergency loans, Chief Executive Bob Nardelli said in a memo to staff obtained by Reuters.

Chrysler cleared another hurdle in its reorganisation on Monday when Daimler AG reached a deal to divest the nearly 20% stake it had held since selling Chrysler to Cerberus Capital Management LP in 2007.

Canadian Industry Minister Tony Clement said it was now more likely Chrysler would not have to go into liquidation following an agreement with the Canadian union that Fiat has concluded is cost-effective. – Reuters

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