April 30, 2009 at 12:57 pm

Obama 'very hopeful' about Chrysler's future

Bankruptcy still possible even with Fiat alliance

President Barack Obama responds to questions during a prime time news conference in the East Room of the White House. (Charles Dharapak / Associated Press)

Washington -- President Barack Obama offered his most upbeat assessment of the domestic auto industry's future Wednesday, saying he is "very hopeful" that Chrysler will survive, but that bankruptcy is still possible.

Three people familiar with the president's plans said he will say in a speech planned for as early as today that the struggling Auburn Hills automaker will not be liquidated. Chrysler and Fiat SpA were expected to announce today that they have reached an agreement outlining the terms of their alliance -- a key hurdle.

The Obama auto task force is making extensive preparations for a short-term bankruptcy filing, including planning to provide Chrysler with roughly $3.2 billion in debtor-in-possession financing. Another $800 million would come from the Canadian government, an Obama administration official said. Chrysler CEO Robert Nardelli is also expected to step down from the revamped company's management as part of the deal, as are other Chrysler executives, the official said.

At a primetime news conference, Obama said automakers were "moving in the direction" that allows them to be "strongly competitive," but warned that aid -- $19.4 billion for General Motors Corp. and Chrysler to date -- can't continue forever.

"With respect to the auto companies, I believe that America should have a functioning, competitive auto industry. I don't think that taxpayers should, simply put, attach an umbilical cord between the U.S. Treasury and the auto companies," he said.

Noting that the "clock is ticking" ahead of a government deadline Thursday to complete a tie-up with Fiat, Obama said he is optimistic "that we can see a resolution that maintains a viable Chrysler auto company out there."

The Treasury Department temporarily hiked its offer Wednesday to $2.25 billion in exchange for $6.9 billion in Chrysler debt, trying to convince a few holdouts, but administration officials said they weren't likely to change their minds.

"The fact that the major debt-holders appear ready to make concessions means that even if they 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," Obama said.

The Treasury Department was in talks with Chrysler and its lenders late Wednesday aimed at avoiding a bankruptcy filing, and administration officials insisted they hadn't settled on forcing the automaker to seek court protection.

"I am actually very hopeful, more hopeful than I was 30 days ago, that we can see a restructuring that maintains a viable Chrysler," Obama said.

Path to the future

The latest restructuring of Chrysler, as well as that of bigger rival GM, comes as the domestic auto industry faces its largest crisis in nearly 30 years. The slow decline of Detroit's automakers accelerated in the past year, as the nation's slowing economy stalled auto sales.

Despite laying off tens of thousands of workers and shuttering dozens of plants in recent years, Chrysler and General Motors continued to lose billions of dollars. Only a federal bailout in the waning days of the Bush administration saved the two auto giants from bankruptcy.

The Obama administration favored the bailouts but pushed the two automakers to develop clear restructuring plans that provided a pathway to future profitability. The auto task force pushed Chrysler to get major concessions from its unions and debt holders. It also pushed Chrysler to partner with Fiat, a marriage that could broaden the carmaker's global footprint while offering new small-car technology.

But a major obstacle remains: Chrysler has struggled to convince all of its 46 creditors to agree to reduce its debt, and failure to reach an accord could trigger a bankruptcy filing. At least three hedge funds -- Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital -- haven't agreed to accept just 29 cents on the dollar.

Chrysler won an agreement in principle with its four major creditors, which hold 70 percent of the debt, to cancel that debt in exchange for $2 billion in cash. The U.S. Treasury on Wednesday upped the offer to 33 cents on the dollar -- in an effort to convince the holdout hedge funds to agree to a deal. The $2.25 billion offer was to expire if an agreement wasn't reached by 6 p.m. Wednesday, at which point it reverted back to the $2 billion offer.

All lenders must approve. The four key banks -- JP Morgan, Citibank, Morgan Stanley and Goldman Sachs -- already have approved, said a person familiar with the banks' position. Some smaller parties also were said to be holdouts.

Chrysler's Nardelli in a letter to employees Wednesday said if the bank deal were approved, "it would clear a significant hurdle on our continuing journey toward long-term success."

'A 97 percent' chance

Administration officials and congressional aides concede a bankruptcy filing remains likely because the hedge funds aren't expected to change their minds. One task force aide said there was "a 97 percent" chance of a bankruptcy filing.

People close to the Obama administration have said even with agreement of all 46 banks, it might still be necessary to force a Chrysler bankruptcy filing to resolve other liabilities.

"We have maintained that negotiations could run up to the deadline, which has always been 11:59 p.m. on the 30th," an administration official said Wednesday, adding that the White House could still decide to delay today's planned announcement.

GM has until June 1 to reach key concessions in completing a tough new restructuring.

A group representing some of GM's biggest institutional bondholders will present a plan to the White House auto task force today that would give bondholders a majority stake in the company -- a far larger stake than that envisioned under a plan GM laid out.

Still unclear is the fate of Chrysler Financial. Obama administration officials have held talks with GMAC about assuming some or all of Chrysler's auto loans. Officials also confirm that Cerberus Capital Management LP -- which owns 80.1 percent of Chrysler -- will not get any return for its investment.

Chrysler and Turin-based Fiat reached a preliminary agreement in January to form a partnership, with Fiat offering Chrysler small car and engine technology and access to its distribution networks in exchange for an equity stake. Fiat Chief Executive Sergio Marchionne is in Washington, in anticipation of a deal today.

Chrysler, which is subsisting on government loans, has reached cost-cutting deals with its unions. The UAW rank and file late Wednesday ratified the contract modifications with Chrysler.

Detroit News Staff Writers Deb Price and Gordon Trowbridge contributed. dshepardson@detnews.com">dshepardson@detnews.com (313) 222-2504

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