http://www.nytimes.com/2009/04/24/business/24chrysler.html?_r=1&hpApril 24, 2009
U.S. Said to Seek a Chrysler Plan for Bankruptcy
By MICHELINE MAYNARD and MICHAEL J. de la MERCED
DETROIT — The Treasury Department is directing Chrysler to prepare a Chapter 11 bankruptcy filing as soon as next week, people with direct knowledge of the talks said Thursday.
The company faces a deadline of April 30 to come up with a viable business plan supported by its creditors, the United Automobile Workers union, and Fiat, the Italian car company that wants to acquire a stake in Chrysler.
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.
Fiat, a company that was struggling this decade, is seeing new opportunities in Detroit’s troubles. Its chief executive, Sergio Marchionne, already in Washington for talks on the Chrysler deal in recent days, has raised the possibility of also acquiring the Opel division of General Motors in meetings with United States officials, a top government negotiator said Thursday.
Such a deal, while far from certain, could turn Mr. Marchionne, a lawyer by training, into one of the most prominent auto executives in the world.
During a call with analysts Thursday, Mr. Marchionne said he had not had direct talks with Opel, adding, “Chrysler is my first and foremost objective.”
Mr. Marchionne has long argued that the number of automakers must shrink. “We need to go back to making cars and making money making cars,” he said Thursday.
He said he was not trying to build a new empire, as some analysts have suggested, but rather create a profitable template for the industry. “The obligation is on all of us not to do stupid things,” he added.
But many analysts doubt that Mr. Marchionne can pull off a three-way deal, despite his success at reviving Fiat since he took over five years ago.
The Chrysler talks, with the deadline nearing, are more urgent than any discussions over Opel, particularly in light of the $6.9 billion in Chrysler debt held by the company’s lenders.
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.
A bankruptcy filing for Chrysler would most likely wipe out existing equity stakeholders, notably Cerberus Capital Management, which took over the carmaker from Daimler in 2007.
Some analysts questioned whether the Treasury’s steps to direct Chrysler to prepare for bankruptcy were an effort to pressure the lenders to come to an agreement outside the courts.
“You have to proceed as if it’s happening, and in doing so, you may avoid it,” said Jeremy Anwyl, a veteran industry analyst and the chief executive of Edmunds.com, a Web site that offers car buying advice.
The Treasury declined to comment. But an administration official who did not want to be named said, “It should surprise no one that the administration is planning on contingencies, but we remain focused on the goal and engaged with all stakeholders to bring Chrysler and Fiat to a working partnership.”
The U.A.W. declined to comment. A Chrysler spokeswoman, Lori McTavish, said, “As we move forward in this process, we believe it’s important to keep all options open.” She added that Chrysler would continue to work through the end of the month, based on direction given by President Obama’s auto task force, “to secure the support of the necessary stakeholders and reach a successful conclusion that the administration and U.S. Treasury deems appropriate.”
The creditors’ claims are backed by most of Chrysler’s collateral, including plants, brands and equipment, and the senior lenders will argue that they have first claim on those assets — even before repayment of the government’s debt.
The government and the creditors have been trading offers, with new ones likely in coming days. The most recent offer, presented Wednesday, would give the company’s lenders about 22 cents on the dollar, or $1.5 billion, and a 5 percent equity stake in a reorganized Chrysler.
This week a steering committee of the lenders proposed that they receive 65 cents on the dollar, or $4.5 billion, and a 40 percent equity stake.
A committee representing Chrysler’s senior lenders is preparing another counteroffer, people briefed on the matter said.
Chief among the creditors’ concerns is that Fiat is being asked to contribute little to a Chrysler alliance, while lenders and the U.A.W. are being asked to make big concessions, this person said.
Yet fissures have emerged within the Chrysler lending group, a collection of roughly 50 banks and hedge funds. The four major banks — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — hold about 70 percent of the roughly $7 billion of Chrysler debt, and they favor striking a deal with the government. Many of the hedge funds, however, are calling for a tougher stance.
The Treasury is also working with General Motors to prepare a possible bankruptcy case, and the terms of a Chrysler filing might offer a glimpse into the shape of a G.M. filing.
G.M. faces a June 1 deadline in its own efforts to draft a restructuring plan. The company said on Thursday that it would idle 13 assembly plants in North America to reduce production by 190,000 vehicles from May through July.
Under the most likely assumptions, Treasury will provide the financing that Chrysler needs to operate while under bankruptcy protection. The Canadian government is also expected to participate in backing the company. The Globe and Mail of Toronto reported the Canadian government’s role on Thursday.
Although Chrysler and Fiat have been discussing an out-of-court agreement, a bankruptcy case would allow Fiat to more easily select the Chrysler assets it wants to preserve.
The approach, which relies upon Section 363 of the federal bankruptcy code, is somewhat similar to what the government is planning in the case of G.M. Then, Chrysler could sell or jettison any assets it did not want to keep and cancel franchise agreements with car dealers it considered superfluous.
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