Chrysler, the carmaker that survived a near-death experience in 1979, began a bankruptcy process designed to revive its business by slashing debt and using small-car technology from Fiat, its new partner. The carmakers and the US government plan to use bankruptcy to transfer Chrysler's best assets, such as its Jeep and Dodge Ram brands, into a new company with streamlined costs and debt. The merger would create the world's sixth-largest car manufacturer.
"Chrysler and Fiat have formed a partnership that has a strong chance of success," said the US president, Barack Obama. The filing for bankruptcy protection from creditors would give the company "a new lease on life", he said. "It's a partnership that will save more than 30,000 jobs at Chrysler and tens of thousands of jobs at suppliers, dealers, and other businesses that rely on this company," Mr Obama said.
The president attributed the need for bankruptcy to dissident lenders who rejected an offer to slash Chrysler's loan debt to $2.25bn from US$6.9bn (Dh8.3bn from Dh25.3bn). The government told the company, the third biggest among US carmakers, that it could qualify for $6bn more in bailout aid if could negotiate a Fiat alliance, cut $10.6bn owed to a pension fund and get all lenders to agree to a debt cut by yesterday.
"While many stakeholders made sacrifices and worked constructively, I have to tell you, some did not," Mr Obama said in announcing the filing in New York. "In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout." The dissident creditors intend to object to the company's reorganisation plan, a person familiar with their thinking said. That might thwart Mr Obama's goal of finishing a bankruptcy within 60 days to put a viable carmaker quickly into the market.
The case will be heard by Judge Arthur Gonzalez in US Bankruptcy Court in New York. He presided over the bankruptcy of Enron, the third-largest US bankruptcy after Lehman Brothers Holdings and WorldCom. Chrysler, with about 54,000 employees, listed assets and debt of more than $1bn in documents filed yesterday in US Bankruptcy Court. Banks including Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs Group had lent Chrysler $6.9bn, secured by factories, property and other assets.
Filings by the Chrysler units Peapod Mobility and Chrysler Realty also listed over $1bn in both debts and assets, and had identical lists of unsecured creditors. Chrysler said in February it had 2009 estimated assets of $51.4bn, which would make it the fifth-largest bankruptcy in US history after Conseco, according to data compiled by Bloomberg. Oppenheimer Funds, Perella Weinberg Capital Management and Stairway Capital Advisors are among the debt holders who refused to go along with the bankruptcy plan, a person representing the group said, asking not to be identified.
Dan Arbess, a partner at New York-based Perella, did not return calls for comment. John Rijo, a principal at the Uniondale, New York-based Stairway, declined to comment. Oppenheimer, based in New York, said it rejected the offers because the government "unfairly" asked the fund's shareholders to make greater sacrifices than were being asked of unsecured creditors. "Our holdings in secured Chrysler debt are entitled to priority in long-established US bankruptcy law, and we are obligated to our fund shareholders to support agreements that respect these laws," the company said in an e-mailed statement.
Chrysler will receive $10.5bn in US and Canadian government financing, the Canadian government said in an e-mailed statement. The US government will receive an eight per cent stake in the company, while Canada and Ontario will jointly receive a 2 per cent stake, the statement from the prime minister's office said. Chrysler will get $8.08bn from the US government and $2.42bn from Canada and Ontario.
Having the government as a party to such a process, on the other hand, may work in Chrysler's favour, lawyers said. "If the secretary of the Treasury suggests to the court that a particular result is important to him and to the nation, it may be hard for a judge to resist," said Richard Hahn, co-chairman of law firm Debevoise & Plimpton's bankruptcy group. The government also has the power to change some of the traditional business rules by changing existing law, he said.
The filing may prove a template for General Motors. GM was given a June 1 deadline by the government to cut costs and debt to qualify for its share of added bailout aid. To become a viable carmaker, GM plans to keep only its most profitable brands, such as Chevrolet and Cadillac. Chrysler, controlled by the private-equity firm Cerberus Capital Management, received the $4bn in January and was promised $6bn more if costs and debt were cut enough. After the initial loan, US car sales plunged to a 27-year low in February and dropped 37 per cent in March.
Founded in 1925 by Walter Chrysler, the company based in Auburn Hills, Michigan, began its history with a reorganisation of Maxwell Motor. Known for high-technology vehicles in the 1930s, it produced brands that included Imperial, DeSoto, Plymouth and Valiant before slimming down to a lineup of Chrysler, Dodge and Jeep. The US government provided Chrysler with $1.5bn in loan guarantees to prevent a bankruptcy in 1979. Lee Iacocca helped lead the company back to profitability, sparked by the pioneering Dodge Caravan minivan and his personal ad pitches.
"If you can find a better car, buy it," he told customers in advertisements in the 1980s. Toyota overtook Chrysler in US sales in 2006, by which time Asian carmakers had 42 per cent of that market. Since last year, Chrysler and other US carmakers have struggled to adapt to high oil prices and the recession. The lack of available credit for its customers was the "single most important element" affecting its viability, Chrysler said in a Feb 17 report to the Treasury Department to support its additional aid request.
* Bloomberg