President Obama has confirmed that Chrysler is to enter Chapter 11 bankruptcy protection after failing to persuade its main lenders to write off debts.
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The White House said it had worked ‘very hard’ to avoid this and blamed creditors not prepared to participate in a proposed deal that would have kept Chrysler out of bankruptcy.
Negotiations with major creditors – including banks and hedge funds – on Chrysler’s debt stalled yesterday evening. While Chrysler’s main banks – holding 70% of debt – accepted the proposal, it was rejected by hedge funds holding the remainder.
“While the administration was willing to give the holdout creditors a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler’s future success,” an administration official said today.
“Their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward.”
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By GlobalDataPresident Obama also confirmed that Chrysler and Fiat have formed a partnership.
The White House described the Chapter 11 move as a ‘surgical short bankruptcy’ which should last between 30 and 60 days.
He also said the necessary steps had been taken to give Chrysler ‘a new lease of life’.
The US Treasury will provide up to US$3.5bn in debtor-in-possession financing so that Chrysler can meet day-to-day obligations while in bankruptcy. A further US$4.5bn will be made available on exit so that it can operate normally when it leaves.
Chrysler bondholders will receive US$2bn in exchange for forgiving US$6.9bn of debt.
Chrysler to take axe to dealer network?
Analysts have said that Fiat may have wanted Chrysler to discharge some of its liabilities within Chapter 11.
“It appears Chrysler will use bankruptcy to cut dealers and has the government’s support to do so, apparently,” said Michelle Krebs, Editor of Edmunds’ AutoObserver.com.
“President Obama’s automotive task force reportedly wants Chrysler to reduce its dealer ranks by more than half to put it more in line with its market share.”
As of the end of the first quarter this year, Chrysler had about 3,200 dealers and 11 percent market share. By comparison, Toyota had just under 1,500 dealers and 16 percent market share. Fewer dealers generate more sales-per-dealer and profits for each dealer. An automaker then can reduce its costs in terms of dealer-support infrastructure, financing and incentive pay. Fewer dealers also allow an automaker to better control its inventories.
In return for a cash-free 20% stake in a restructured Chrysler that would rise to 35% and possibly higher, Fiat would provide Chrysler with much-needed small car platforms and technology under the terms of an outline agreement reached in January. The two would also share distribution networks.
Nine directors on ‘New Chrysler’ board
When it emerges from Chapter 11, ‘New Chrysler’ will be managed by a board of directors consisting of nine directors: three directors will be appointed by Fiat.
One of Fiat’s appointees must satisfy the criteria for independence under the New York Stock Exchange listing rules. The UAW-run trust fund VEBA and the Government of Canada will have the right to appoint one director respectively. The US Treasury will have the right to make the initial appointment of four directors (three of whom must be independent).
Fiat will have right to receive up to an additional 15% equity interest (by vote and value) on a fully diluted basis. This stake can be obtained in three tranches of 5% each subject to the achievement of predetermined targets, in particular, achievement of regulatory approvals to produce the FIRE family of engines in the USA; achievement of sales of Chrysler vehicles outside NAFTA, and achievement of regulatory approval to produce a Chrysler model based on Fiat technology. Upon obtainment of such additional 15% interest, Fiat will also have the right to appoint another director of Chrysler.
In addition, Fiat will be granted an option to acquire an additional 16% shareholding (exercisable from Jan 1, 2013 until June 30, 2016). That option will not be exercisable while the US Treasury outstanding loan exceeds US$3 billion.
Fiat’s shareholding will be capped at 49% until Chrysler has repaid in full the loans granted by the US Treasury.
Chrysler manufacturing to be idled
Chrysler said today that most of its manufacturing operations will be temporarily idled effective Monday, May 4.
Normal production schedules will resume when the transaction is completed, which is anticipated within 30 to 60 days, it said.
“This partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages,” said Bob Nardelli, Chairman and CEO of Chrysler. “It enables us to better serve our customers and dealers with a broader and more competitive line-up of environmentally friendly, fuel-efficient high-quality vehicles. Benefits to the new company include access to exciting products that complement our current portfolio, technology cooperation and stronger global distribution.”
“We want to personally assure everyone that the new company will produce and support quality vehicles under the Jeep, Dodge and Chrysler brands as well as parts under the Mopar brand. Chrysler employees will become employees of the new company. Chrysler dealerships remain open for business serving our customers. All vehicle warranties will be honored without interruption and consumers can continue to purchase our vehicles with complete confidence,” said Nardelli.
Watch: Short video clip of Obama on Chrysler, speaking today (April 30)
See also: US: Chrysler on Ch 11 brink
