DETROIT/WASHINGTON (Reuters) - Chrysler LLC filed for bankruptcy on Thursday and announced an industry-changing deal with Fiat, after being pummeled by sliding auto sales and unable to reach agreement on restructuring its debt.
The Chrysler logo is reflected in the rear view mirror of a vehicle on the lot at Clark Chrysler Jeep Dodge dealership in Methuen, Massachusetts April 30, 2009. REUTERS/Brian Snyder
Despite weeks of intense negotiations, Chrysler failed to gain full support from its lenders to avoid the first-ever bankruptcy filing by a major U.S. automaker.
The move was hailed by President Barack Obama as a critical step in saving 30,000 jobs at Chrysler, majority-owned by Cerberus Capital Group, and hundreds of thousands more jobs at affiliated suppliers and dealers.
At the same time, Chrysler entered an expected alliance with Fiat SpA, in which the Italian carmaker was given an initial stake of 20 percent.
The deal will allow Fiat to own up to 35 percent as it makes investments in U.S. operations and small-car technology for Chrysler. Over time, Fiat could eventually own 51 percent after Chrysler has repaid its loans to the U.S. Treasury.
Chrysler has struggled in recent years to compete, hurt by its near total reliance on the U.S. market, poor quality and a truck and SUV-dominated vehicle line-up with the lowest combined fuel economy of any major automaker.
Founded in 1925 by Walter P. Chrysler, three years later the company laid the cornerstone for the Chrysler Building, briefly the world’s tallest building and still a landmark on the Manhattan skyline.
The Chapter 11 filing, in U.S. Bankruptcy Court in Manhattan, has implications for the entire industry — including Chrysler’s rivals and suppliers.
As part of the filing, the U.S. government will provide up to $3.5 billion in debtor-in-possession (DIP) financing and up to $4.5 billion in exit financing. Obama said he hopes the entire process will take only 30 to 60 days.
Some of Chrysler’s 3,600 U.S. dealers are expected to close, and Chrysler Financial will stop providing loans for new cars and trucks. Instead, General Motors Corp’s financing arm, GMAC, will provide loans to Chrysler dealers and customers.
The legal proceedings will be overseen by Judge Arthur Gonzalez, the same jurist who oversaw the Enron and WorldCom bankruptcies.
In addition to Fiat’s ownership stake, U.S. officials expect Chrysler to be 55 percent owned by the United Auto Workers’ healthcare trust fund while the U.S. and Canadian governments hold a combined stake of 10 percent.
Chrysler has three manufacturing plants in Canada and had to reach agreements with its unions there and the Canadian government under the restructuring. The automaker is not filing for bankruptcy in Canada, but the Canadian government, along with the province of Ontario, said they will provide $2.42 billion in financing to help the company restructure.
FIGHTING WORDS
The bankruptcy signals that Obama is prepared to play hardball with holdout lenders rather than knuckle under to their demands and will likely set the tone for similar discussions with bondholders of General Motors — which is now on the clock to restructure its operations by the end of May.
While Obama voiced his support for Chrysler and the deal with Fiat, he was pointed in his criticism of the investors who did not agree to this deal.
“I don’t stand with them. I stand with Chrysler’s employees and their families and communities,” the president said. “I don’t stand with those who held out when everybody else is making sacrifices. That’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations.”
This is not the first major government action with Chrysler. In 1980, U.S. President Jimmy Carter signed a bill providing Chrysler with more than $1 billion in loan guarantees.
“Bankruptcy is what they have been headed for in the past several months,” said Mirko Mikelic, portfolio manager at Fifth Third Bank. “The biggest concern now is that the different stakeholders will be able to make the tough decisions they need to make.”
Chrysler Chief Executive Robert Nardelli will leave the automaker following the emergence from bankruptcy. The U.S. government will place six members on the new company’s board and Fiat will appoint three.
Shares of Chrysler’s U.S. rivals reacted positively to the news. GM shares ended 6.1 percent higher and Ford Motor Co ended up 9.7 percent, both on the New York Stock Exchange.
FIAT: A DONE DEAL
The bankruptcy filing did not stall the Fiat deal.
Chrysler has been seeking a rescue deal from the Italian automaker while also trying to finalize its debt agreement.
“It’s a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry,” Obama said. “Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry.”
In court documents on Thursday, Chrysler detailed its lengthy search for a partner over the last year and a half, including talks with General Motors and Nissan. Those talks did not pan out and Chrysler eventually found its way to Fiat.
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The government’s debt-restructuring talks have been spearheaded by the Obama administration’s autos task force and former investment banker Steve Rattner.
In a bid to win over three fund firms that had spurned an offer to accept $2 billion in cash in exchange for writing off all of Chrysler’s $6.9 billion in secured debt, U.S. officials sweetened the terms by throwing in another $250 million, people familiar with those discussions said.
Chrysler’s plight reflects a slump in demand facing a global industry whose $2.6 trillion annual revenue is equivalent to the GDP of France and which employs more than 9 million people.
The American auto company Chrysler filed for bankruptcy Thursday, however a deal with European auto maker Fiat went through. The emerging Chrysler will be owned 55 percent by the United Auto Workers, eight percent by the United States Government, two percent by the Canadian Government and Fiat would begin with a 20 percent share.
US president Barack Obama
Chrysler Chief Executive Robert Nardelli will step down when the bankruptcy proceedings are finalized.

Initially, the Italian company, Fiat, will appoint three members on the emerging Chrysler's new board, and the United States government will appoint six. Fiat can assume the majority of the ownership upon repayment of American loans.

Chrysler administrators expect that the bankruptcy should take a couple of months.

"We expect this to be a very short, 30-to-60-day bankruptcy process, during which the company will function normally," a top administration official said, "People will be able to buy cars, they will have their warranties honored, and everything should go on normally." 

The bankruptcy filing indicated that Chrysler was in debt to 20 creditors to a tune of more than $10 million each.

Meanwhile, the deal with Fiat did go through, and Chrysler should have cars designed by Fiat out on the market by 2011.

"It's a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry," said American president Obama, "Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry."

However, automotive analyst Erich Merkle has hesitations.

"History would show that alliances really don't work that well," Merkle said, "even though, no matter how good they may look on paper."

The restructuring has been managed by Steve Rattner, a former investment banker, and the U.S. Government auto task force.

Obama has set three ultimatums before Fiat. Fiat should produce a 40 mile per gallon vehicle while managing the new Chrysler, transfer fuel efficient Fiat technology to Chrysler factories in the United States, and produce cars in Chrysler factories and distribute them in Europe.