Chrysler End Game: BK Next Week if No Deal (and Journal Says Even if a Deal)

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.

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  1. Richard Kline

    Point the starter’s pistol at the left temple of the real economy, and pull the trigger.

    I wouldn’t give a nickle to or for the PE pirates who bought and control Chrysler. That said, forcing a BK is like blowing up a building with onself locked in the basement to get the ‘terrorists’ on the roof. Bo Prez, Larry, and Tim know hos to do these things, though, right? I mean, BK is essential to bringing those unions into obeisance, right?? Whhhhooooa, daddy; Whhhhhoooooooaaa, daddy.

  2. tyaresun

    Credit Writedowns is reporting that Fiat is going for Opel not Chrysler. This is going to be so much fun.

  3. john bougearel

    Here is what I am thinking. I read the BN article, and have not had time to consider the NYT or WSJ piece.

    As bad as a bk of Chrysler is for the real economy, and god knows it will be horrific, Chrysler is going to be a trial balloon for the Obama admin. Put another way, Chrysler is a test case.

    Chrysler is not an overnight LEH shock to the system. It is well telegraphed, and what safety nets the powers that be think that are essential are in place.

    So, I kid you not, the spread gap between what the creditors who are banksters want and what the gubmint is willing to give them, that gap I want to remain at roughly 50 cents or higher. I want to see the gubmint stick to their “we gonna give you 15 cents on the dollar” guns. If they succeed at that, then they will have take the first step to showing some political guts, which is what is going to be needed to solve the rest of the crisis centered in the financial system. If the admin can make them banksters who are Chrysler creditorsd “squeal like a pig” then I would give the admin three very brief cheers. Cheers would necessarily be brief because the truly hard work will remain ahead of them, and that is the liquidation of the banksters themselves.

    I am going to use the Chrysler resolution as a case study indicator for Obama admins political will, which if they can show some, might also be extended to resolving the sacred cows known as Citi, BAC, and perhaps even GS.

    We must be careful in this transference, we can not assume political will in resolving automakers will transfer to resolving banksters, because as we all know, the admin suffers from regulatory capture. But as I said, I hope that the Chrysler case will help cure them of the regulatory capture from which they suffer.

  4. B. Mull

    As is often said, Chrysler is a pension and benefits company pretending to be an automaker. Gettelfinger got the government to guarantee half the health care shortfall and a quarter of the pension shortfall.

    And the “shortfalls” are bogus anyway because the markets may rebound. In keeping with Chrysler’s true business, most of bondholders’ money in the last few years went to these funds. The benefits were extremely generous to begin with and they’re not in horrible shape now.

    So having accomplished its business plan, Chrysler can now be wound down. Bondholders will do better in liquidation. Chrysler’s own high estimate of 43 cents on the dollar sounds about right. Cerberus can ditch this albatross. Ford and GM will say they need more help because of the disruption. And I suspect all of the other stakeholders will find a way to wet their beaks too. Sayonara!

  5. Lune

    Anyone know how Cereberus will fare in any of these scenarios? Quite frankly, they should be the first “stakeholder” to be squeezed. A process which decimates bank creditors and damages unions while allowing Cereberus to walk away unscathed would be deeply unfair (although par for the course for Geithner and his Wall St. puppet masters)

  6. bob

    I often wonder about how cereberus hedged itself when it went in to this deal. Could they actually gain on the default? Remember, they didn’t actually pay anything for Chrysler.

    In a worst case scenerio, they installed a terrible CEO and ran it into the ground in order to collect on cds’s. Not that far off the charts from what I know/have heard about nardelli.

    There is not enough press on all of the seats Cereberus is occupying in the auto industry. They were also half owners of GMAC. Now a bank, I lost track after that.

  7. sangellone

    Assuming Chrysler is to be a car company and not a Federal jobs program, what is it that it can sell? Chrysler 300’s? Dodge Ram pickups with Hemi engines? Jeeps that get 15 mpg?

    Team Obama has got more than a financial dilemma here, it’s got a dichotomy between the kind of cars it thinks Americans should drive and the kind of cars Chrysler can offer. Will people even want a Jeep
    if it is some underpowered lightweight clone of a Suzuki Samurai. Will contractors buy a Ram
    pickup that has been ‘greened’?

  8. B. Mull

    Cerberus sank $5 billion into Chrysler at the beginning, but unloaded most of that to about 100 co-investors. I’m guessing the $2 billion loan from Chrysler Financial’s future profits is pretty close to what Cerberus took out in management fees, etc. They wouldn’t want it known that they made money on this fiasco. Plus, the government is now motivated to approve the merger of Chrysler Financial and GMAC, so taxpayers can actually get back the $2 billion and Cerberus has a chance to make a whole lot of money.

  9. bob

    ‘The debt package also includes Chrysler Automotive’s $12 billion leveraged loan, which is still being postponed due to market conditions. Cerberus will hold the $2 billion 6½-year second-lien loan, while banks underwriting the $10 billion six-year first-lien loan, including J.P. Morgan, Bear Stearns, Goldman Sachs, Citigroup and Morgan Stanley, will hold the $10 billion tranche.’

    Some more good details in the story.

    Another seat at that table:
    ‘When Daimler sold a majority stake in Chrysler in 2007 to a private equity firm, Cerberus, it promised to pay $1 billion into the government’s pension insurance program if the pension plan failed within five years. The Treasury could try to persuade Daimler to put some of that money into the plan to avoid a failure. ‘

  10. Brick

    Chrysler’s rescue plan looked to hinge on sharing platforms with Fiat, otherwise they would not really be big enough to compete in the global market. With Fiat looking at GM Europe/Holden/Saturn, which is many respects is a better business, the future for Chrysler looks bleak. If fiat is looking at parts of GM then potentially it has the same problem in that it will no longer be big enough to compete in a global market.
    Chapter 11 with profitable brands either being sold off to the likes of Toyota or Nissan for next to nothing or to an equity firm which will milk it as it runs it into the ground. It is nothing new and happens outside the US regularly.

  11. bob

    “Will contractors buy a Ram
    pickup that has been ‘greened’?”

    Only if they paint it pink.

    Come on…..Do you still beat your wife?

    Obamarx is going to make everyone in america drive flamboyantly gay cars that he designs himself. The chrysler cock is first, followed by the jeep jihad. Buying them will be mandatory in red states.

    I am still amazed people want a car with 2 engines(hybrids). Henry Ford is trying to dig his way out of the grave to get at that one.

    Never underestimate the stupidity of the american public, they will buy anything.

    Between the Caravan and the Wrangler, chrysler has already sold almost 50,000 cars this year, as much as the vaunted civic. The ram alone sold 46,000. Someone is buying what they are selling, even now.

    For the record, I am not a fan of his, it’s just very easy to take the other side of that argument, and in this instance, it was fun.

  12. "DoctoRx"


    Your move to limit comments has worked! Thanks . . .

    May I add that the alleged “Big Three” have for some years morphed into finance companies with manufacturing subs? Seen in that context, the agony of the automakers is entirely of a piece with what’s going on elsewhere in this credit-induced mess.

    (Perhaps the single most annoying ad on CNBC in the real estate bubble days was GMAC’s sub Ditech with its cross-dressing fat man pushing subprime mortgages.)

  13. tz

    Obama’s team doesn’t meet CAFE standards, and the last administration said go out and buy an SUV as it was patriotic.

    It is not protectionism to insist we not buy from countries where workers have no rights, they dump raw toxic waste directly into the air and water, and otherwise don’t play by civilized rules. Some of e-bay’s highest rated vendors are fronts for shoplifting rings, but that is not free trade.

    Chrysler may be a (3 headed?) dog (will Harry Potter’s “fluffy” be the antidote), but it is one that provides jobs for americans and plays by the rules such as they are.

    CAFE standards are an 80+ billion dollar tax. It would be like insisting that McDonalds sell salads or other “healthy” food for a nickel to maintain a “corporate average nutritional quality”. Let the Japanese sell the tiny or “green” cars at a profit (the Priuses may all be sold at a loss), and let us do the SUVs.

  14. run75441


    Guess I gotta check in on this topic.

    66,000 workers up for grabs plus a probable equal number of tier 1 & 2 workers, the same number of retirees, and a vast assortment of other non-automotive related businesses. Lets say another quarter of million job to be impacted? And retiree benefits to be PGBC? Return of which has been 40 cents on the dollar for some who have gone before. Lots of political capital gonna be spent on this one if Obama does not pull a rabbit out of the hat for these people.

    Jeeps and Minivans are the mainstay of Chrysler; but, there is no reason it can't be better in other areas such as mid and large cars also. The goger rabbit cars are ugly in comparison to what GM and Ford offer. Cut some more models, keep the Dodge line of pickup trucks and vans and it could be viable as a smaller auto manufacturer. Yea, smaller and more efficent needs to be accomplished and they were on the road until W$ went cliff diving.

    The largest issue with gasoline and oil conservation is "not" what is being driven around. It is how they are being driven. When gasoline proces went up; everyone slowed down, drove less frequently, and planned their trips. Net result was an ~5% reduction in gasoline usage. Changing our habits will have a large impact on energy. We are spoiled by our living in the US.

    Creditors aren't going to roll, at least the big ones won't. We are playing with the likes of Citi and Sachs. They are probably hedged against the default of Chrysler in which case, they will make more money. CDS anyone???

    Just a few thoughts . .

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