naked capitalism

The obstacle to a bailout of Chrysler is the still large bid and ask spread between what the secured creditors are now willing to agree to in the way of a haircut, versus what Treasury is willing to give them. The drop dead date is next Thursday. But news reports tonight differ on what a deal versus no bank creditor group deal implies.

If there is no resolution, Chrysler will file for bankruptcy. Note this will not be a prepak; the lack of an understanding with the secured creditors precludes that option.

The disparity is over what happens if the banks and Treasury close the gap. The New York Times and Bloomberg indicate a deal with creditors will prevent a bankruptcy filing; the Wall Street Journal indicates one is in the cards regardless (presumably, the BK would be a prepak, but the Times reports the UAW pension and health contracts would be preserved as a result of negotiation, which is more consistent with a prepak).

From the New York Times:

The Obama administration has told Chrysler it will provide up to $6 billion in new financing, on top of the $4 billion in loans it has already given the company, if Chrysler can complete a deal by next Thursday with a cost structure that gives it a chance of survival. The creditors have so far balked at the terms suggested by the Treasury.

But the negotiations have taken a new direction. Treasury now has an agreement in principle with the U.A.W., whose members’ pensions and retiree health care benefits would be protected in the event of a bankruptcy filing, said the people with knowledge of the discussions, who asked for anonymity because they were not authorized to discuss the case.

Moreover, under this outcome, Fiat would complete its alliance with Chrysler while the company is under bankruptcy protection….

Despite any hopes for a smooth outcome from a Chapter 11 filing, there are risks in bankruptcy. Consumers may avoid Chrysler cars because of worries about their quality or resale value.

From Bloomberg:

The U.S. Treasury Department is preparing a bankruptcy filing for Chrysler LLC only as a matter of “due diligence,” Michigan Senator Debbie Stabenow said in an interview.

“They are preparing all options,” Stabenow, a Democrat, said yesterday in Washington. The senator said she was told April 22 the filing was being readied.

Time is dwindling for Auburn Hills, Michigan-based Chrysler to reorganize outside of bankruptcy. It has until April 30 to seal an alliance with Italian automaker Fiat SpA, get its banks to agree to cut its debt and reach agreements with the United Auto Workers and Canadian Auto Workers unions on labor cost reductions….

Chrysler, surviving with $4 billion in U.S. loans, must win concessions and create the alliance to qualify for up to $6 billion more in loans.

It shouldn’t be a surprise that the administration is planning for contingencies while trying to bring Chrysler and Fiat into a working partnership, said an administration official, who declined to be identified discussing the planning.

As you can see, both pieces contend that either Chrysler obtains the concessions it needs to get the $6 billion or it files for Chapter 11. Contrast that with the Journal:

Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.

If an agreement with the car maker’s lenders can be reached, Chrysler would file for bankruptcy protection to rid itself of some liabilities. That would let Fiat pick and choose which operations it wants, these people said. The U.S. government would provide bankruptcy financing while the reorganization plays out.

The United Auto Workers union is on board with the plan and likely would end up owning a sizable stake in the restructured car maker, said these people.

A relatively orderly bankruptcy filing along these lines would represent a measure of success for the Obama administration. But if a deal with Chrysler’s banks and Fiat cannot be reached, the company would begin the process of liquidation, with assets potentially sold to many buyers or shut down, said these people. Chrysler has shrunk radically in recent years but still employs 66,000 people in the U.S…..

In either Chrysler scenario, the impact would ripple through the supply chain of car dealers, parts makers and others, as well as the economies of Midwestern states. The Obama administration said a bankruptcy proceeding wasn’t inevitable, with officials insisting that a successful outcome outside of court was still possible…..

In either Chrysler scenario, the impact would ripple through the supply chain of car dealers, parts makers and others, as well as the economies of Midwestern states. The Obama administration said a bankruptcy proceeding wasn’t inevitable, with officials insisting that a successful outcome outside of court was still possible….

But Chrysler’s chief financial officer told major lenders Wednesday that even if a deal can be worked out between the government and lenders, the company still will need to file for bankruptcy to seal a Fiat alliance, said people familiar with the situation. The executive, Ron Kolka, told lenders that a provision of U.S. bankruptcy code known as section 363 would allow Fiat to pick which brands, plants and dealership agreements it wants to keep, said these people.

So the Journal says the choice is not BK or no BK, but Chapter 11 versus liquidation. Eeek. It also argues that it is the Obama administration that is trying to preserve the notion that a a bailout without a bankruptcy filing is on the table.

I’d be curious to get any informed reader comment on that use of section 363. It has been invoked a lot lately for how the judge used it in Lehman. But Lehman was a company that was clearly NOT going to emerge from bankruptcy, and I have read some commentary that says a judge would be very reluctant to use its power in other contexts. Back to the Journal:

Reorganizing three auto makers on three continents could move the world-wide car industry a big step toward the kind of large-scale consolidation that long has been overdue. For years, auto makers have struggled with excess capacity that has fostered intense price competition and squeezed profits.

The problem has festered because stronger car makers have steadily added plants while governments often have stepped in to prop up ailing car companies to preserve jobs.

Any bid to restructure three auto makers is likely to prove highly complex and risky for the companies involved and the Obama administration. Chrysler is in such bad shape precisely because its cross-border merger with Daimler AG ended in failure after eight years….

By negotiating with the two Detroit car companies at once, Fiat Chief Executive Sergio Marchionne is making a big double bet. Mr. Marchionne made it clear last year that he wants to boost Fiat’s capacity from its current 2.2 million cars a year to between 5.5 and six million cars a year.

Fiat considers GM’s assets complementary to its pursuit of a Chrysler stake because the car maker will only truly propel itself to the big leagues of the global market if it has a strong U.S. presence, said people familiar with the matter.