30 April 2009

Chrysler Files For Bankruptcy

Debt holders, believing that they could get a more fair deal in bankruptcy court, refused to sign on to a non-bankruptcy reorganization of Chrysler, forcing the automaking into a Chapter 11 bankruptcy today, a deadline for obtaining new government financing conditioned on a viable non-bankruptcy deal. The big players in the bankruptcy, and a sketch of the expected reorganization plan which is described below.

[A] holdout group wouldn't budge on proposals to reduce Chrysler's $6.9 billion in secured debt. . . .

Chrysler will file for Chapter 11 bankruptcy protection in New York, giving Chrysler time to galvanize a partnership with the Italian car maker Fiat Group SpA. The government, which has already poured $4 billion in loans into Chrysler, would provide up to $8 billion more to carry the company through bankruptcy . . . . The government will also help appoint a new board of directors. . . .

[T]here would be no job losses or plant closing due to the Chapter 11. But it will be up to Fiat and Chrysler to decide whether to restructure the steadily shrinking company. . . .

Chrysler Financial, the arm of the company that makes loans to buyers and to dealers to finance their inventories, will be merged into GMAC Financial Services, once General Motors Corp.'s finance arm. The new GMAC will get government support. . . .

[T]he United Auto Workers ratified a cost-cutting pact Wednesday night.

Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler's debt in return for $2 billion in cash. But the administration said about 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through. . . . the Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. But in the end, this person said most thought they could recover more if Chrysler went into bankruptcy and some of its assets were sold to satisfy creditors. . . .

Fiat will obtain a 20 percent stake in Chrysler in return for giving the company access to its fuel-efficient technology, a move toward cleaner cars that the Obama administration thinks is critical to Chrysler's future survival. The company has committed to building Fiat cars in Chrysler factories, to be sold as Chryslers. . . . The administration expects [the bankruptcy] to last only up to 60 days.

Obama's auto task force in March rejected Chrysler's restructuring plan and gave it 30 days to make another effort, including a tie-up with Fiat. The company has borrowed $4 billion from the federal government and needs billions more to keep operating.

The UAW agreement, which would take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler's U.S. facilities and to share key technology with Chrysler.

Meanwhile, the Fiat partnership means Chrysler CEO Robert Nardelli could be out of a job. In an April e-mail to employees, he said that if the deal is completed, Chrysler would be run by a new board appointed by the government and Fiat. The new board, Nardelli wrote, would pick a CEO "with Fiat's concurrence."


Secured debt holders are entitled to payment equal to the fair market value of their collateral in a Chapter 11 bankruptcy reorganization plan, and generally speaking have a claim to those assets that has priority over all other claims, unless they receive a substitute payout of reasonably equivalent value.

In a Chapter 11 bankruptcy, the firm continues to operate, assets can be sold in a manner definitively free of any legacy obligations, union-management contracts may be breached, and debts can be compromised. Company management has the exclusive right to propose a plan of organization, which creditors must accept if a majority of claims by value in each class of creditors agree to the plan, or if a class of creditors receives no less than what would have been received if the company was liquidated. Companies making loans for funds received after a bankruptcy have priority as an administrative expense over all debt not secured by collateral.

Part of what makes the Chrysler bankruptcy atypical is that most of Chrysler's debt is secured by collateral. Publicly held companies generally favor bonds not supported by any specific collateral for financing, rather than the secured financing that Chrysler has, which is more typical of a privately held firm like Chrysler. At GM bondholders have essentially the same entitlements in a Chapter 11 bankruptcy as employee health care trust obligations, for example, while at Chrysler, financing debt has priority over the company's other obligations to the extent of the collateral.

The gamble that the hedge funds are taking is that a New York City bankruptcy judge will agree with them on what their collateral is worth. Given the downturn in the automobile industry, the limited usefulness of automobile industry assets to anyone else in or outside the industry at this point in time, that is a serious gamble.

Meanwhile, bondholders at General Motors are also balking over the deal that they have been offered in the GM non-bankruptcy reorganization plan, so it may be necessary for it too to file for Chapter 11 bankruptcy in a matter of days or weeks.

While car warranty liabilities are, in theory, subject to discharge in a Chapter 11 bankruptcy, it is highly likely that the plan of reorganization will fully reaffirm these debts in order to sustain consumer confidence in the post-bankruptcy company, and to prevent every warranty holder with a car from the company from becoming a claimant in the bankruptcy.

The third of the Big Three American automobile makers, Ford, has not received government funds to bail it out and is not believed to be planning an imminent bankruptcy.

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