April 30, 2009 - Chrysler - Fiat, Washington D.C.

Chrysler to File For Bankruptcy

Backed by $3.5 billion more in aid, Chrysler-Fiat to emerge in 30-60 days

Chrysler to File For Bankruptcy

President Barack Obama said today that Chrysler LLC will file a historic bankruptcy shortly, backed by up to $3.5 billion in new government aid designed to allow a Chrysler-Fiat partnership to emerge from court in 30 to 60 days.

The move also sends a strong signal to bondholders at General Motors Corp. that the Obama auto task force will act on its vow to take GM into a similar bankruptcy if they do not agree to swap their GM debt for shares in a reworked GM.

Under Chrysler's bankruptcy, to be filed in New York in a matter of hours, the two automakers along with the UAW, Fiat and a majority of lenders will ask a judge to force a swap of $6.9 billion in debt for $2 billion in cash. The number of Chrysler dealers, now about 3,200, will be reduced through bankruptcy, but the administration officials did not say how many would be eliminated.

The agreement with Fiat will allow the Italian company to take a 20% stake in Chrysler that will grow as Fiat meets certain milestones, such as building new models in Chrysler plants. In addition to the $3.5 billion in financing to keep Chrysler operating while in bankruptcy, the government will also provide up to $4.7 billion for the new Chrysler once it emerges.

The Obama administration will also give additional aid to GMAC so that it can take over lending to Chrysler's customers and dealers from Chrysler Financial, which the government has deemed not viable. And the Canadian government will also provide new financial aid to Chrysler's operations in that country in return for 2 per cent in the new Chrysler.

The administration portrays its "surgical" bankruptcy of one of Detroit’s major automakers as just a legal chore, rather than the threat to Chrysler’s existence and the entire U.S. auto industry that Chrysler itself had described less than three months ago. Administration officials said Chrysler would operate as usual during bankruptcy, and that no additional job cuts were anticipated as of now.

The government will take a stake in the company and have a say in helping Chrysler and Fiat select a new board of directors. Chrysler Chief Executive Robert Nardelli has said he would step down after the partnership was cemented.

The decision to take Chrysler into bankruptcy came after three lenders -- Oppenheimer Funds, Perella Weinberg Partners, and Stairway Capital – balked at the original $2-billion offer, as well as an increase of $250 million from Treasury on Wednesday evening. The White House and Michigan’s congressional delegation pressed the holdouts to agree by 6 p.m. Wednesday, but no deal was reached.

The administration "was willing to give the holdout creditors a final opportunity to do the right thing," an administration official said. But "the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success."

The lack of an agreement will not "impede the new opportunity Chrysler now has to restructure and emerge stronger going forward," the official said.

The U.S. Treasury had guaranteed the warranties of Chrysler and General Motors Corp. in part to assuage worries of customers who might think twice before buying from a bankrupt automaker. GM has a June 1 deadline to reach its own debt agreement or go through a similar move.

President Obama said Wednesday that “even if they (Chrysler) ended up having to go through some sort of bankruptcy, it would be a very quick type of bankruptcy and they could continue operating and emerge on the other side in a much stronger position.”

The UAW late Wednesday night overwhelmingly ratified cost-cutting changes in its labor contract that freeze wages for Chrysler's 26,000 U.S. hourly workers and slash more than $5 billion from what Chrysler was to pay into a retiree health care trust next year. That trust would own 55% of the new Chrysler, while Fiat would start with a 20% stake and the government would own another large portion.

Fiat will ratify its agreement with Chrysler today to share technology and engineering resources Chrysler and the UAW have valued at $8 billion to $10 billion.

The Obama auto task force had been pressing for GMAC LLC to step into the role held by Chrysler Financial. It was not immediately clear how much additional aid or regulatory help GMAC would receive for taking on the role, nor what would happen to Chrysler Financial.

Another lingering question: whether Fiat would sell vehicles under its own brands through Chrysler, even as the government pressed GM to cull its brands due to shrinking U.S. market share.

An administration official said the case would be filed in New York because the bankruptcy court there has extensive experience with large cases, including those of Delphi Corp. and Northwest Airlines.

Original Story - Detroit Free Press