President Barack Obama said Thursday that Chrysler will file a historic bankruptcy shortly, backed by up to 3.5 billion US dollars in new government aid designed to allow a Chrysler-Fiat partnership to emerge from court in 30 to 60 days.
The move also sends a strong signal to bondholders at General Motors Corp. that the Obama auto task force will act on its vow to take GM into a similar bankruptcy if they do not agree to swap their GM debt for shares in a reworked GM.
“The necessary steps have been taken to give one of America’s most storied companies a new lease on life,” Obama said.
Under Chrysler's bankruptcy, to be filed in New York, the two automakers along with the UAW, Fiat and a majority of lenders will ask a judge to force a swap of 6.9 billion in debt for 2 billion US dollars in cash. The number of Chrysler dealers, now about 3,200, will be reduced through bankruptcy, but the administration officials did not say how many would be eliminated.
The agreement with Fiat will allow the Italian company to take a 20% stake in Chrysler that will grow as Fiat meets certain milestones, such as building new models in Chrysler plants. In addition to the 3.5 billion in financing to keep Chrysler operating while in bankruptcy, the government will also provide up to 4.7 billion for the new Chrysler once it emerges.
The Obama administration will also give additional aid to GMAC so that it can take over lending to Chrysler's customers and dealers from Chrysler Financial, which the government has deemed not viable. And the Canadian government will also provide new financial aid to Chrysler's operations in that country in return for 2% in the new Chrysler.
The Obama administration portrays its surgical bankruptcy of one of Detroit’s major automakers as just a legal chore, rather than the threat to Chrysler’s existence and the entire US auto industry that Chrysler itself had described less than three months ago. Administration officials said Chrysler would operate as usual during bankruptcy, and that no additional job cuts were anticipated as of now.
The US government will take a stake in the company and have a say in helping Chrysler and Fiat select a new board of directors. Chrysler Chief Executive Robert Nardelli has said he would step down after the partnership was cemented.
The decision to take Chrysler into bankruptcy came after three lenders -- Oppenheimer Funds, Perella Weinberg Partners, and Stairway Capital – balked at the original 2-billion offer, as well as an increase of 250 million from Treasury on Wednesday evening. The White House and Michigan’s congressional delegation pressed the holdouts to agree by 6 p.m. Wednesday, but no deal was reached.
“A group of investment firms and hedge funds chose not to make sacrifices. In fact they wanted to qualify for an in justified government bailout,” Obama said. “Some demanded twice the return other investors would have received.”
The lack of an agreement will not impede the new opportunity Chrysler now has to restructure and emerge stronger going forward, the official said.
The US Treasury had guaranteed the warranties of Chrysler and General Motors Corp. in part to assuage worries of customers who might think twice before buying from a bankrupt automaker. GM has a June 1 deadline to reach its own debt agreement or go through a similar move.
President Obama said Wednesday that “even if they (Chrysler) ended up having to go through some sort of bankruptcy, it would be a very quick type of bankruptcy and they could continue operating and emerge on the other side in a much stronger position.”
The UAW late Wednesday night overwhelmingly ratified cost-cutting changes in its labour contract that freeze wages for Chrysler's 26,000 U.S. hourly workers and slash more than 5 billion USD from what Chrysler was to pay into a retiree health care trust next year. That trust would own 55% of the new Chrysler, while Fiat would start with a 20% stake and the government would own another large portion.
Fiat will ratify its agreement with Chrysler Thursday to share technology and engineering resources Chrysler and the UAW have valued at 8 billion to 10 billion.
An administration official said the case would be filed in New York because the bankruptcy court there has extensive experience with large cases, including those of Delphi Corp. and Northwest Airlines.