Chrysler will proceed with bankruptcy as Fiat deal appears close

Chrysler will proceed with bankruptcy as Fiat deal appears close
 

Talks with bondholders halted; Obama to speak at noon

Automotive News | April 30, 2009 – 7:48 am EST

 

WASHINGTON (Reuters) — Chrysler LLC will proceed with Chapter 11 bankruptcy protection now that talks with debt holders have broken down, an administration official said today.

Chrysler also appears close to wrapping up its partnership agreement with Italian automaker Fiat S.p.A. by a U.S.-ordered midnight deadline.

President Barack Obama and the federal auto task force are scheduled to make a statement on the Chrysler reorganization today at noon.

Chrysler this morning still had not gained the bondholder support it needs to move forward with a restructuring and avoid the first-ever bankruptcy filing by a Detroit 3 automaker. Talks among those parties and the U.S. Treasury broke down overnight despite a sweetened Treasury offer.

An administration official with knowledge of the talks said the holdout creditors were provided a final opportunity to approve an increased offer of $2.25 billion in cash, up from $2 billion, in exchange for writing off all of Chrysler’s $6.9 billion in secured debt. They were given a deadline of 6 p.m. Wednesday.

"While the Administration was willing to give the holdouts a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler’s future success," the official said.

"Their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders, nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward."

Prospects for an alliance with Fiat were enhanced when UAW workers voted to approve concessions late Wednesday. Italian newspaper Corriere Della Serra reported Thursday morning that a deal with Fiat had been signed, but Fiat later denied this.

While getting a Fiat deal done is a key part of Chrysler’s historic day, bondholders still hold the key.

"I think there is reasonable optimism that (a deal between Fiat and Chrysler) can be closed with an announcement perhaps even by President Obama today," Italian Industry Minister Claudio Scajola told Italian television on Thursday.

Chrysler, owned by Cerberus Capital Management LP, is among the world car industry’s weakest players. Its plight reflects a slump in demand facing an industry whose $2.6 trillion annual revenue is equivalent to the GDP of France and which employs over 9 million people.

Obama more hopeful

On Wednesday, Obama said concessions by Chrysler’s unions and its major bank lenders had made him more hopeful than a month ago that the automaker could be made viable.

But he added it was still not clear if Chrysler would need to seek bankruptcy protection to cement concessions from lenders and move ahead with the Fiat deal.

The White House has set a series of aggressive targets for Chrysler in order to justify another $6 billion in investment on top of $4 billion in emergency loans the government has extended since the start of the year.

The No. 3 U.S. automaker has also won cost-cutting concessions from its Canadian union. Putting Chrysler and Fiat together would give the combined group annual sales of some 4.16 million vehicles, making it equal with Hyundai and behind Toyota, General Motors, Volkswagen and Ford.

Fiat CEO Sergio Marchionne thinks a carmaker needs to produce at least 5.5 million cars a year to survive.

Under the terms of the proposed partnership, Fiat would get access to the U.S. market and a minority stake in Chrysler in exchange for the technology to make small cars and access to overseas markets. No cash would change hands.

Scajola said the Chrysler deal would also give the Italian company "good cards" to play in a reorganization of the European car sector, where speculation has linked Fiat to France’s Peugeot and the Opel unit of GM.

Sweeter deal for bondholders

But in the final stretch before the deadline for a deal, the focus for Chrysler was on ongoing debt restructuring talks spearheaded by the Obama administration’s autos task force and former investment banker Steve Rattner.

In a bid to win over three fund management firms that had spurned an offer to accept $2 billion in cash in exchange for writing off all of Chrysler’s $6.9 billion in secured debt, U.S. officials sweetened the terms by throwing in another $250 million, people involved in those discussions said.

About 45 financial institutions hold Chrysler’s secured debt.

Chrysler’s race to restructure has played out as a kind of prelude to the slower-moving process under way for GM.

GM, which has been kept in operation with $15.4 billion of U.S. government funding, has until June 1 to push ahead with its own restructuring which includes plans to shrink its U.S. dealership network by 40 percent in less than two years.

 

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