April 30, 2009 at 1:00 am

Chrysler files for Chapter 11 bankruptcy

Washington -- Chrysler LLC filed for bankruptcy protection Thursday afternoon and announced it has reached a partnership agreement with Italian automaker Fiat SpA.

The filing in U.S. Bankruptcy Court in New York is an effort to quickly wipe clean Chrysler's balance sheet, backed with $8 billion in U.S. government financing, in the hopes that the company will emerge in 30 to 60 days.

The White House forced the move Thursday after talks between the Treasury Department and some of the Auburn Hills automaker's creditors failed to reach an agreement.

"It will be efficient. It's designed to deal with those last few holdouts, and it will be controlled," President Barack Obama said in a 12-minute address from the White House. "It will not disrupt the lives of the people who work at Chrysler or live in communities that depend on it. ... I have every confidence that Chrysler will emerge from this process stronger and more competitive."

Under the plan the administration outlined Thursday, the Treasury Department will provide Chrysler with up to $3.5 billion in debtor-in-possession financing, and the Canadian and Ontario governments will provide around $800 million and get 2 percent of Chrysler's equity.

Obama confirmed Thursday that Chrysler and Turin-based Fiat reached a deal outlining the company's partnership agreement -- as well as confirming Chrysler will need a stay in bankruptcy court to erase some of its debts and liabilities and trim its dealer network.

The 24-page filing in court by Chrysler's lead law firm Jones Day was assigned to U.S. Bankruptcy Judge Arthur J. Gonzalez, who has been on the court for 14 years.

"(Bankruptcy) is the only path. It is the most viable path to make sure that Chrysler survives," Chrysler CEO Robert Nardelli told reporters on a conference call.

Chrysler filed for bankruptcy protection under Section 363(b) of Chapter 11 of the bankruptcy code -- a move that will allow it to split off the "good" assets and form a new company.

Chrysler won't terminate its pension plan or stop paying retirees health care benefits, the company said.

The government will loan GMAC LLC additional money so it can take over financing of Chrysler vehicles from Chrysler Financial. The government already has infused nearly $6 billion into GMAC. Nardelli said it will likely lead to a merger of Chrysler Financial and GMAC.

The Treasury also will provide Chrysler with $4.5 billion in exit financing. Chrysler will have a new board of directors and the government will take a role in helping to select the board. Nardelli told CNBC Thursday he would leave the company after it emerges from bankruptcy.

"Given where we were, (bankruptcy) ended up being the only solution," Nardelli said. "Not one that I would have chosen first, but a decision we had to make."

A UAW health care trust will own 55 percent of Chrysler's stock, but it will be administered by the U.S. Treasury. The U.S. government will own 8 percent.

The Treasury will appoint four members of the board; Fiat will appoint three; Canada will appoint one; and the UAW trust will appoint a member.

Fiat will start with a 20 percent stake in Chrysler and, as it meets three different milestones -- including building a 40 mpg vehicle in the United States -- it will get a total of 35 percent stake in the company.

President criticizes hedge funds

The president had harsh words for the group of investment companies and hedge funds that balked at a debt restructuring. "I do not stand with them," Obama said, calling them "speculators" who sought to endanger Chrysler's future for their own benefit.

Obama also said that Ed Montgomery, the labor expert who he appointed to oversee aid federal aid to hard-hit auto communities, will travel to Michigan again next week to meet with local officials.

A key sticking point was at least three of Chrysler's 46 lenders have refused to accept a deal to exchange a total of $6.9 billion in debt for $2 billion in cash. The Treasury Department on Wednesday raised that offer to $2.25 billion, but withdrew at 6 p.m. after some lenders rejected it.

But four major lenders holding 70 percent of the debt agreed to the deal on Tuesday -- giving Chrysler a better chance of quickly emerging from bankruptcy.

"While the administration was willing to give the holdout creditors 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," an administration official said Thursday morning. "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."

Administration officials have said there are other liabilities that Chrysler may want to discharge in bankruptcy, including some dealer agreements and lawsuits.

The Obama administration had rejected Chrysler's Feb. 17 restructuring plan and request for $5 billion in additional aid, saying Chrysler wasn't viable as a standalone company.

Automaker avoided bankruptcy before

The iconic American automaker, which between 1936 and 1949 was the second-largest U.S. auto company, narrowly avoided bankruptcy in 1980, when it won a $1.5 billion government loan guarantee that it repaid in 1983, ahead of schedule, in part on the strength of the K-Car and the sale of its defense unit.

In 1998, it was sold for $36 billion to Daimler-Benz -- a troubled tie-up that ended in 2007, when the German automaker sold Chrysler to Cerberus Capital Management LP in a $7 billion deal.

Cerberus will relinquish all equity.

Chrysler avoided collapse last winter when the Bush administration agreed to loan the company $4 billion. In January, Chrysler Financial received a $1.5 billion loan to boost auto lending. Chrysler's sales fell 30 percent in 2008, compared with an industry decline of 18 percent. In the first three months of the year, Chrysler's sales are off 46 percent.

This marks another tie-up with a European automaker -- though at a time of sharply lower auto sales. It's still not clear how Chrysler will survive until 2011 -- when the first Fiat-inspired vehicles roll off the assembly line.

The administration had signaled for months that it thought a bankruptcy filing for Chrysler -- and for General Motors Corp. -- might be the "best option." The officials were convinced that a stay in bankruptcy could be short -- pointing to the example of the sale of most of Lehman Brothers to Barclays in just five days last year.

But the administration had to overcome fierce opposition from the UAW and Michigan members of Congress. Auto executives repeatedly warned that they feared with so many car companies to choose from, customers wouldn't buy a car from a bankrupt company. Last month, the Obama administration announced it was creating a $1.25 billion program to guarantee the warranties of GM or Chrysler vehicles if they were forced into bankruptcy and couldn't honor them.

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