May 1, 2009 at 10:27 am

'New lease on life'

Obama confident bankruptcy will save Chrysler

Obama backs viability plan, provides $8B in additional aid. (Saul Loeb / AFP / Getty Images)

Washington -- Chrysler LLC filed for bankruptcy protection and finalized a partnership with Italian automaker Fiat SpA on Thursday -- dramatic steps that will reshape the ailing U.S. auto industry but do not come without substantial risks.

"It is the only path," Chrysler CEO Robert Nardelli said. "It is the most viable path now to make sure that Chrysler survives."

Chrysler's bankruptcy, the sixth largest in U.S. history, was forced by the White House in another highly unusual case of government involvement in a private company.

President Barack Obama's auto task force was convinced that the automaker must shed billions of dollars in liabilities, cut its dealer network and start fresh, despite risks that a bankruptcy could drag on for months or years or that consumers might shy away from buying Chrysler vehicles.

The filing followed intense talks with the task force and came after some of Chrysler's creditors rejected concessions to shrink the company's debt.

Obama called bankruptcy and the Fiat alliance "a new lease on life" for Chrysler and committed another $8 billion in federal aid to the Auburn Hills-based automaker, on top of $4 billion it has already recieved.

The administration's move to sharply boost its investment in Chrysler, which it had warned could not survive on its own and might have to liquidate, suggests that the government is also likely to invest billions more in a healthier General Motors Corp.

GM, which has received $15.4 billion in loans, has sought another $11.6 billion in federal aid and faces its own June 1 government deadline to restructure or file bankruptcy.

The administration insists Chrysler can exit bankruptcy in as little as 30 to 60 days through a "surgical" proceeding that consists of quickly selling Chrysler's good assets and forming a new company and leaving the bad assets behind.

Chrysler's management team and board will be replaced, including Nardelli -- and the government will appoint four of nine new directors.The key factor in emerging is convincing U.S. Bankruptcy Judge Arthur J. Gonzalez, who oversaw the Enron and WorldCom bankruptcies, to agree to a fast exit over the strong objections of some secured creditors and dealers. Chrysler and the government are seeking an unprecedented timetable for a major industrial company.

Chrysler emphasized the risks of a lengthy stay in court. In a court filing in New York late Thursday, Chief Financial Officer Ron Kolka said Chrysler's significance to the economy "is difficult to overstate" and a successful bankruptcy "averts a liquidation of historic proportions," saving tens of thousands of jobs at Chrysler, its dealers and parts suppliers.

Chrysler has repeatedly avoided collapse for the past three decades, winning a government bailout in 1980 and again in December. It suffered through a disastrous tie-up with Daimler-Benz in 1998 and divorce in 2007, followed by private equity ownership that shrunk the company's workforce by 33,000 workers to its lowest level since 1934.

If Chrysler survives, it will be smaller and largely operate under the control of Fiat, which will have the power to approve Chrysler's new chairman and chief executive. Its vehicle mix will shift from SUVs and Hemi engine-power to small, European-inspired models.

Chrysler Vice Chairman and President Tom LaSorda said Fiat and Chrysler had agreed to build Fiat's C-EVO platform in the United States -- including the Fiat 500 hatchback. The alliance will be the sixth largest automaker in the world by sales volume. "It is Chrysler's last best hope," LaSorda said in a court filing. "I know because I have spent over two years looking for, talking to and evaluating potential partners."

Chrysler on Monday will seek court permission to keep business as usual, but took the unexpected step of announcing it would halt U.S. and Canadian production up to nine weeks while in bankruptcy, beginning next week. It also disclosed plans to liquidate eight of its 23 U.S. plants, including three in Metro Detroit.

Chrysler's bankruptcy will put even more pressure on the struggling auto parts industry as it copes with sharply lower auto industry production this summer.

Chrysler's bankruptcy will not be cheap and it may be messy. The automaker expects to spend $20 million a month on legal and other professional fees. Three Chrysler plants halted production Thursday after parts suppliers refused to ship.

Chrysler, which disclosed Thursday it had a staggering net loss of $16.8 billion last year and has seen sales fall 50 percent this year, will have to survive until 2011 before any new Fiat-designed vehicles arrive in U.S. showrooms.

The Obama administration will loan Chrysler another $8.1 billion, and Canada will chip in $2.4 billion, to finance the bankruptcy, pay off creditors and provide the new company with start-up funds.

It also will provide billions to GMAC LLC to assume responsibility for auto lending for Chrysler, a move Nardelli said could lead to a merger of Chrysler Financial and GMAC. The government has already invested nearly $6 billion in GMAC.

Officials said the government will not recover much of the $4 billion the government has already loaned to Chrysler.Chrysler filed for bankruptcy protection under Section 363(b) of Chapter 11 of the bankruptcy code, allowing it to split off its "good" assets as the basis for a new company.

Chrysler won't terminate its pension plan or stop paying retiree health care benefits. Cerberus Capital Management LP will give up all its equity.

The Treasury also will provide Chrysler with $4.5 billion in exit financing.

Obama administration officials are convinced that Chrysler needs to build more fuel efficient and small cars. The government has offered Fiat an additional 5 percent stake in the company, free, when it builds vehicles in the U.S. that get 40 miles per gallon -- an environmental priority of the administration.

Fiat will start with a 20 percent stake in Chrysler and, as it meets three different milestones it will get a total of 35 percent stake in the company. It won't be able to assume a majority stake until Chrysler's loans are paid off.

A key sticking point was the refusal of at least three of Chrysler's 46 lenders 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 it that evening, after some rejected it.

In a surprising turn of events, one of the funds reversed course and agreed to the deal.

Perella Weinberg Partners' agreed to the Chrysler settlement offer and urged the other holdouts to follow suit.

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

While politicians castigated the banks, the Obama administration insisted that even if all the banks had agreed, Chrysler wouldn't have necessarily avoided a bankruptcy filing.

Administration officials have emphasized there are other liabilities that Chrysler will seek to discharge in bankruptcy, including some dealer agreements and lawsuits. Officials declined to say how much Chrysler would wipe off its books, but that it was substantial.

Chrysler wants to cut many of its 3,200 dealers.

The bankruptcy filing comes after more than six months of uncertainty. Nardelli and Detroit's other two automakers sought billions in aid from Congress last November, but were excoriated for flying on private jets to request a handout.

Ultimately, the Bush administration agreed to provide $17.4 billion to GM and Chrysler, giving them a short window to restructure.

On March 30, the Obama administration rejected Chrysler's Feb. 17 restructuring plan and request for $5 billion in additional aid, saying Chrysler wasn't viable as a standalone company.

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