Chrysler files for bankruptcy
DETROIT: The first sound of the gavel in Chrysler's bankruptcy case might as well be the bang of a starter's pistol.
The nation's third-largest automaker filed for Chapter 11 bankruptcy protection Thursday with an ambitious plan to emerge in as little as 30 days as a leaner, more nimble company. And Chrysler's first hearing in a New York courtroom Friday morning may offer the first clue as to whether a quick, "surgical" bankruptcy is actually possible.
After months on government life support, Chrysler is pinning its future on a top-to-bottom reorganisation and plans to build cleaner cars through an alliance with Italian automaker Fiat. In return, the federal government agreed to give Chrysler up to $8 billion in additional aid and to back its warranties.
On Friday morning, bankruptcy court Judge Arthur Gonzalez is scheduled to hear the case's first motions, which typically will allow the company to continue paying workers and basic utility costs as it restructures.
Eventually, Gonzalez will have to sort out the key issue that made bankruptcy necessary: the creditors that hold $6.9 billion of the Chrysler's debt.
Four of the largest banks holding 70 percent of the debt agreed this week to a deal that would give them $2 billion. But a collection of hedge funds refused to budge, saying the deal was unfair and would only return a small fraction of their holdings.
President Barack Obama on Thursday chastised the funds for seeking an "unjustified taxpayer-funded bailout" after Chrysler and his auto task force cleared the company's other hurdles. Along with the Fiat deal, Chrysler adopted a cost-cutting pact with the UAW this week.
"They were hoping that everybody else would make sacrifices and they would have to make none," Obama said. "I don't stand with those who held out when everybody else is making sacrifices."
One lender, OppenheimerFunds Inc., said it rejected the government offer because it "unfairly asked our fund shareholders to make financial sacrifices greater than the sacrifices being made by unsecured creditors."
The White House said Chrysler could come out of bankruptcy in 30 to 60 days. Under normal circumstances, it would be difficult to complete such a large bankruptcy so quickly.
But John Pottow, a University of Michigan professor who specialises in bankruptcy, said the government's level of involvement is much greater than in a typical corporate bankruptcy.
"If you have the president of the United States who wants something to happen, I think anything's possible in bankruptcy protection," he said.
In the meantime, Chrysler said it will close all of its plants starting Monday and they will remain closed until the company comes out of bankruptcy. At least three Detroit-area factories sent workers home Thursday after suppliers stopped shipping parts over fears they would not be paid.
"A lot of us are scared," said Steve Grabowski, 33, who has worked at a Warren, Mich., parts stamping plant for seven years and was sent home Thursday. "We knew something like this was going to happen, but we didn't think it would be so soon."
Chrysler CEO Robert Nardelli announced he would step down when the bankruptcy is complete and take a post as an adviser with Cerberus Capital Management LP, which will give up its 80 percent ownership of Chrysler under the automaker's plan. Vice Chairman Tom LaSorda, who once ran the company when it was owned by the German automaker Daimler, said he would retire.
Chrysler's bankruptcy filing is the latest step in a drastic reordering of the American auto industry, which has been crushed by higher fuel prices, the recession and customer tastes that are moving away from the gas-guzzling SUVs that were once big money makers.
The administration has sunk about $25 billion in aid into Chrysler and rival General Motors Corp.
GM faces its own day of reckoning on June 1, a date the administration has set for it to come up with its own restructuring plan. GM has announced thousands of job cuts, plans to idle factories for weeks this summer and has even offered the federal government a majority stake in the company as it races to meet the deadline.
Like at Chrysler, debt may be the stumbling block. GM has asked its unsecured bondholders to exchange $27 billion of debt for a 10 percent stake in the automaker. The creditors balked, saying that would leave them with just pennies on the dollar and that they deserve a majority stake if they give up their claims.
When Chrysler emerges from bankruptcy, the United Auto Workers union will own 55 percent of the automaker and the U.S. government will own 8 percent. The Canadian and Ontario governments, which are also contributing financing, would share a 2 percent stake.
Under the deal, Chrysler would gain access to Fiat's expertise in small, fuel-efficient vehicles. The U.S. automaker eventually wants to build cars that could get up to 40 mpg, far more economical than its current fleet focused on minivans, Jeep SUVs and the Dodge Ram pickup.
In exchange, Fiat would initially get 20 percent of the company, but its share could rise to 35 percent if certain benchmarks are met, and Fiat said Thursday it could get an additional 16 percent by 2016 if Chrysler's U.S. government loans are fully repaid. Fiat would also gain access to the North American market through Chrysler factories and dealerships.
Fiat CEO Sergio Marchionne said he planned to spend time meeting Chrysler's employees and touring its plants over the next few weeks.
He said Fiat was preparing for Chrysler to "re-emerge quickly as a reliable and competitive automaker." Fiat also plans to reintroduce brands like Alfa Romeo in North American markets.
The Fiat deal and bankruptcy cap a disastrous time for Chrysler.
Chrysler lost $8 billion last year and its sales through March were down 46 percent compared with the year-earlier period, leading some auto industry analysts to question whether Chrysler can survive even in bankruptcy.
But company executives told reporters Thursday that Chrysler vehicles with Fiat's fuel-efficient technology should reach showrooms in 18 months.
Vice Chairman Jim Press said Chrysler has cut expenses to operate profitably at a lower sales volume, and he said it would be able to take advantage of Fiat's distribution network to sell more vehicles globally.
Chrysler's LaSorda said in court papers that the automaker started to think about potential alliances as early as fall 2006, when Chrysler was still owned by DaimlerChrysler AG.
In the spring of 2007, LaSorda began negotiations with Nissan-Renault that went through several iterations, and Chrysler also started talks with GM in June 2008. The two companies even studied how much could be saved through a combination, but by November the worsening U.S. economy forced GM to focus on its own liquidity problems.
LaSorda named a number of other carmakers that Chrysler approached, including Toyota Motor Corp., Volkswagen AG, India's Tata Motors, the Hyundai-Kia Automotive Group, Russia's GAZ, Mitsubishi and Honda Motor Co., as well as a number of Chinese automakers. He said it had also approached some suppliers and parts manufacturers.
Despite the turmoil with Chrysler and GM's looming deadline, Obama urged consumers to keep buying cars.
"If you are considering buying a car, I hope it will be an American car," he said.