FixItAgainTony to save Chrysler?
Source - CNN Money
Chrysler files for bankruptcy
Some lenders refuse offer to reduce debt, leading to Chapter 11 bankruptcy filing. But Chrysler will remain in business and completes deal with Fiat.
NEW YORK (CNNMoney.com) -- Chrysler LLC filed for bankruptcy Thursday. But a deal has been reached to combine the company with Fiat in order to allow Chrysler to stay in business.
The bankruptcy filing, which was made in federal court in New York, comes after some of Chrysler's smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.
In remarks at the White House, President Obama said that the bankruptcy filing is not a failure for the company but "one more step on the path to Chrysler's revival."
The president harshly criticized the hedge funds and investment firm creditors that refused to go along with the deal accepted by larger lenders, saying that they had "decided to hold out for the prospect of an unjustified, taxpayer funded bailout."
Obama vowed the bankruptcy process would be quick, efficient and controlled. A senior administration official predicted it would be completed within 30 to 60 days. The combination with Fiat is also due to close during that period of time.
0:00 /4:21Fiat's big Chrysler challenge
According to the bankruptcy filing, a new company will be formed that will buy the assets of Chrysler - its plants, brands, land, equipment, as well as its contracts with the union, dealers and suppliers, from the bankruptcy court.
The company's liabilities and an unspecified number of Chrysler's 3,300 dealerships which now sell the Chrysler, Dodge and Jeep brands will be left behind in the bankruptcy court.
Jobs safe for now, but plants will close temporarily
While an administration official promised there will be no immediate job cuts or plant closings due to the bankruptcy filing, Chrysler announced that most manufacturing operations will be temporarily shutdown on Monday, May 4. Normal production is not due to resume until the transaction with Fiat is completed.
Once the deal closes, Fiat will examine the cost structure of Chrysler to find additional savings. Fiat has promised to use Chrysler's existing plants to build the small cars it now sells in Europe for the U.S. market.
Administration officials said the Treasury Department will provide Chrysler with about $8 billion in loans on top of the $4 billion in loans it has already received.
Officials said $3.3 billion of the new loans will be used to fund operations during bankruptcy, while the remaining $4.7 billion will allow Chrysler to function normally once it exits bankruptcy.
In addition, the Canadian government will loan the companies $2.7 billion to help support Chrysler's Canadian operations.
The company faced a midnight Thursday deadline from the Treasury Department to reach deals with creditors who had loaned the company about $7 billion.
Last-minute deals ensured Chrysler's survival
But the filing will not mean the halt of operations or liquidation for the troubled 85-year old automaker. Instead, the administration expects to use the bankruptcy process to join Chrysler with Italian automaker Fiat.
Chrysler CEO Bob Nardelli will leave the company after Chrysler emerges from bankruptcy and completes the alliance with Fiat. A successor for Nardelli was not named by either Chrysler or Fiat.
In addition, the United Auto Workers union announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified a concession contract reached between the company and union leadership on Sunday night.
As a result of that deal, the UAW will own 55% of Chrysler. Fiat will own a 20% stake with the option of increasing it to 35%. The U.S. government will own 8% and Canada will have a 2% stake.
The union issued a statement Thursday afternoon saying it supported the bankruptcy process and the combination of the company with Fiat. It said it would ask the bankruptcy court to quickly approve the merger of the two companies as well as the new labor agreement.
President Obama said Thursday he was more confident than he was 30 days ago that Chrysler would be able to emerge from bankruptcy as a healthy, competitive company. He said the deals reached over the last month are in the best interests of not only Chrysler, its workers, suppliers and dealers, but also of taxpayers who are funding the reorganization.
The administration said Wednesday evening that talks with smaller lenders broke down when they refused to meet a deadline set by the Treasury Department to accept pennies on the dollars they had loaned the company.
Major banks such as Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) agreed to reduce their portion of $7 billion in secured loans to a more manageable $2.25 billion, according to the administration official.
But an administration official said "the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success."
Chrysler and the rest of the auto industry have been hit by a sharp plunge in sales due to the global recession and tighter credit. Chrysler's U.S. sales during the first three months of this year were down 46% from year ago levels. That followed an industry-worst 30% slide in sales last year.
Being privately held, Chrysler has not released its financial results for recent years. But the company needed a $4 billion federal loan in the closing days of the Bush administration to avoid running out of cash, while rival General Motors (GM, Fortune 500) received the first of what turned out to be $15.4 billion in federal loans so far.
Those federal bailouts staved off an uncontrolled bankruptcy at Chrysler that could have caused a rash of failures across the auto supplier industry and disrupted production at other automakers. Chrysler owes its suppliers about $7 billion, according to the latest figures available from the company. Some of those suppliers could still be hurt by the bankruptcy filing.
Chrysler is only a fraction of its former self. It has about 39,000 U.S. employees, only about 40% of the total it had at the beginning of the decade. It has fallen behind not only Toyota Motor (TM) in sales, but it is close to being overtaken by Honda (HMC) for the No. 4 spot for U.S. sales.
The company also has about 3,300 dealers who between them have 140,000 employees. It also has 65,000 U.S. retirees as well as their family members who depend upon the company for pension benefits and heath care coverage.
CNN White House correspondent Suzanne Malveaux contributed to this story.