Apr30
Chrysler files for bankruptcy, links with Fiat
DETROIT (Reuters) -- Chrysler LLC filed for bankruptcy today in New York and charted its future by entering an alliance with Italy's Fiat S.p.A.
Despite intense negotiations over the past few weeks, Chrysler failed to gain the full support from its lenders to avoid the first-ever bankruptcy filing by a major U.S. automaker. Fiat will take an initial stake of 20 percent, and the Italian automaker can become the majority owner once the government loans are repaid.
"Over the past month, seemingly insurmountable obstacles have been overcome," President Barack Obama said in a televised statement. "Chrysler and Fiat have formed a partnership that has a strong chance of success ."
The Chapter 11 filing, in U.S. Bankruptcy Court in Manhattan, was expected to send shock waves through the entire industry -- including Chrysler's rivals, suppliers, dealers and the hundreds of thousands who rely on the industry for their livelihoods.
As part of the filing, the U.S. government will provide up to $3.5 billion in debtor-in-possession (DIP) financing and up to $4.5 billion in exit financing. Obama, during a noon address in Washington, said he hopes the entire bankruptcy process will take no more than 60 days.
"No one should be confused about what a bankruptcy process means," he said. "It's not a sign of weakness."
Hardball
The bankruptcy signals that Obama is prepared to play hardball with holdout lenders rather than knuckle under to their demands and will likely set the tone for similar discussions with bondholders of General Motors -- which is now on the clock to restructure its operations by the end of May.
This is not the first major government action with Chrysler. In 1980, U.S. President Jimmy Carter signed a bill providing Chrysler with more than $1 billion in loan guarantees.
"This transaction represents a constructive and important solution to the problems that have plagued not just Chrysler in recent years, but the global automotive industry as a whole," said Fiat Group CEO Sergio Marchionne in a statement.
"Bringing together Fiat's world-class technology, platforms and powertrains for small and medium sized cars, and its extensive distribution network in Latin America and Europe with Chrysler's rich heritage, strong North American presence and talented and dedicated workforce will create a powerful new automotive company, while helping preserve jobs and a manufacturing industry that is critically important to the U.S. and Canadian economies."
"Bankruptcy is what they have been headed for in the past several months," said Mirko Mikelic, portfolio manager at Fifth Third Bank. "The biggest concern now is that the different stakeholders will be able to make the tough decisions they need to make."
Not precluded
The bankruptcy filing does not preclude the Fiat deal.
Chrysler has been seeking a rescue deal from the Italian automaker while also trying to finalize its debt agreement.
The debt restructuring talks have been spearheaded by the Obama administration's autos task force and former investment banker Steve Rattner.
In a bid to win over three fund firms that had spurned an offer to accept $2 billion in cash in exchange for writing off all of Chrysler's $6.9 billion in secured debt, U.S. officials sweetened the terms by throwing in another $250 million, people familiar with those discussions said.
In an earlier memo to employees obtained by Reuters, Chrysler CEO Robert Nardelli had said reaching an agreement with lenders was the company's main focus.
Chrysler, majority-owned by Cerberus Capital Group, has been among the car industry's laggards, but its plight reflects a slump in demand facing an industry whose $2.6 trillion annual revenue is equivalent to the GDP of France and which employs more than 9 million people.
On Wednesday, Obama said concessions by Chrysler's unions and its major bank lenders had made him more hopeful than a month ago that the struggling automaker could be made viable.
The automaker has won cost-cutting concessions from its unions in the United States and Canada and was on the verge of closing its deal with Fiat on Wednesday, a person involved in those negotiations told Reuters.
Putting the two car producers together should give the combined group annual sales of some 4.16 million vehicles, in line with Hyundai and behind Toyota, General Motors, Volkswagen and Ford.
SOURCE: AUTOMOTIVE NEWS
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