Chrysler files bankruptcy without lender concessions, agrees in principle to Fiat alliance

By Caroline Salls

Pittsburgh, April 30 - Chrysler LLC filed for Chapter 11 bankruptcy Thursday in the U.S. Bankruptcy Court for the Southern District of New York after reaching an agreement-in-principle to establish a global strategic alliance with Fiat SpA that resulted from a comprehensive restructuring plan agreed to by many of Chrysler's stakeholders, according to a Chrysler news release.

Despite substantial progress, Chrysler said it was not able to obtain the necessary concessions from all of its lenders, which could have kept the company out of bankruptcy.

"Even though total agreement was not possible, I am truly grateful for all that has been sacrificed, on the part of many of Chrysler's stakeholders, to reach an agreement in principle with Fiat," Chrysler chairman and chief executive officer Bob Nardelli said in the release.

"My number one priority has been to preserve Chrysler and the thousands of people who depend on its success.

"While I am excited about the creation of the global alliance, I am personally disappointed that today Chrysler has filed for Chapter 11. This was not my first choice."

Under the agreement, Fiat powertrains and components will be produced at Chrysler manufacturing sites.

"This partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages," Nardelli said in the release.

"It enables us to better serve our customers and dealers with a broader and more competitive line-up of environmentally friendly, fuel-efficient high-quality vehicles.

"Benefits to the new company include access to exciting products that complement our current portfolio, technology cooperation and stronger global distribution."

Fiat deal terms

Chrysler said Thursday that it started discussions with Fiat more than a year ago to develop plans for a global product alliance.

Over the past several months, these discussions have evolved and expanded, and Chrysler and many of its stakeholders worked to agree on concessions that will result in a significantly lower cost base and enable fulfillment of a broader strategic alliance.

According to a court filing, the Fiat alliance transaction is being financially backed by the U.S. Department of the Treasury and Export Development Canada, an affiliate of the Canadian government, which together will provide the new alliance with about $6 billion of taxpayer money to start up and maintain operations.

Under the agreement with Fiat, Chrysler will transfer the majority of its operating assets to New CarCo Acquisition LLC (New Chrysler), a limited liability company that currently is an indirect wholly owned subsidiary of Fiat.

New Chrysler will assume some of the existing company's liabilities and pay to Chrysler $2 billion in cash.

"We want to personally assure everyone that the new company will produce and support quality vehicles under the Jeep, Dodge and Chrysler brands as well as parts under the Mopar brand," Nardelli said in the release.

"Chrysler employees will become employees of the new company. Chrysler dealerships remain open for business. All vehicle warranties will be honored without interruption and consumers can continue to purchase our vehicles with complete confidence."

'Swift' exit planned

The company said it will request "swift" court approval of the Fiat agreement and the sale of Chrysler's principal assets to the new company to be formed by the alliance.

Chrysler said the new company should emerge from bankruptcy in 30 to 60 days, "well positioned for long-term viability."

Nardelli, who has been leading Chrysler since August 2007, said he plans to leave the company after the new company emerges from Chapter 11 and the Fiat alliance is completed.

According to the release, the government will provide enough debtor-in-possession financing during the restructuring process to allow continuation of "business as usual."

"To create this vibrant new company, we are using this structured bankruptcy to rapidly implement tough but necessary changes, including: the agreed upon wage and benefit structure for active and retired employees that is competitive with those of transplant manufacturers; a reduction of debt and interest expense; the disposition of idle assets; a rationalized and more efficient dealer network; and sound agreements with our suppliers," Nardelli said in the release.

New company ownership

When the Fiat transaction is completed, Chrysler said the Voluntary Employee Beneficiary Association (VEBA) will own 55% of the new company and the U.S. and Canadian governments will own proportionate shares of a 10% stake.

Fiat will initially hold a 20% ownership stake in Chrysler, according to the release, and Fiat will have the right to increase its ownership stake an additional 15% in three increments, including 5% for bringing a 40 miles per gallon vehicle platform to Chrysler to be produced in the United States; 5% for providing a fuel-efficient engine family to be produced in the United States for use in Chrysler vehicles; and 5% for providing Chrysler access to its vast global distribution network to facilitate the export of Chrysler vehicles.

Chrysler said Fiat cannot become a majority owner until after all U.S. government loans have been completely repaid.

Chrysler said its Mexican, Canadian and other international operations are not part of the bankruptcy filing.

GMAC preferred lender

Additionally, Chrysler said it has agreed in principle with GMAC Financial Services to become the preferred lender for Chrysler dealer and consumer business, as GMAC will be able to offer the best long-term finance options for Chrysler dealers and customers with standard rate installment products.

According to a GMAC news release, GMAC will be the preferred provider of new wholesale financing for Chrysler dealer inventory, and it has a four-year agreement for incentivized retail financing with limited exclusivity.

"Providing financing options to dealers and consumers is critical as we work through one of the most challenging periods in the global auto sector," GMAC CEO Alvaro G. de Molina said in the GMAC news release.

"We will leverage our strengths and capabilities as the leading automotive finance company to serve our new customers, while maintaining our commitment to current customers.

"Serving as the primary source of financing for Chrysler is consistent with our strategy to diversify our automotive business.

"We intend to work through the operational process quickly and effectively to ensure that the appropriate level of credit is available to support the sale of Chrysler vehicles."

GMAC said the U.S. government has indicated that it intends to support GMAC in promoting the availability of credit for dealers by making liquidity and capital available and by providing the capitalization that GMAC needs to support Chrysler's business.

GMAC clarified that it will leverage its servicing platform to provide customer service for newly originated assets, and that it has not acquired Chrysler Financial's existing assets or debt.

Operations idled

As a part of the restructuring, Chrysler said most manufacturing operations will be temporarily idled, effective May 4, and normal production schedules will resume when the transaction is completed.

In a separate release, John McEleney, chairman of the National Automobile Dealers Association, said bankruptcy is not the preferred option for Chrysler, but the association has every expectation that Chrysler and its dealers will emerge stronger and more competitive than ever.

However, McEleney warned that bankruptcy must not be used to drastically reduce dealer numbers, as a "rapid reduction in dealer numbers would not only do absolutely nothing to improve Chrysler's viability in the short term, but it would actually work against Chrysler's stated objective to increase revenue and cut costs."

The chairman said the key now is for Chrysler to emerge from bankruptcy as quickly as possible.

"The shorter the bankruptcy, the better for the entire industry," the NADA release said.

Debt details

According to court documents, Chrysler has more than $1 billion in both assets and debts.

The company's largest unsecured creditors include:

• Ohio Module Mfg. Co. LLC of Toledo, Ohio, with a $70.34 million trade claim;

• BBDO Detroit Inc. of Troy, Mich., with a $58.06 million trade claim;

• Johnson Controls of Holland, Mich., with a $50.31 million trade claim;

• Continental Automotive of Auburn Hills, Mich., with a $47 million trade claim;

• Cummins Engine Co. Inc. of Columbus, Ind., with a $43.91 million trade claim;

• Germersheim Spart Parts of Germany, with a $36.23 million trade claim;

• Comau Inc. of Southfield, Mich., with a $32.07 million trade claim;

• Visteon of Toledo, Ohio, and Van Buren Township., Mich., with a $25.61 million trade claim;

• New Process Gear Division of East Syracuse, N.Y., with a $19.64 million trade claim; and

• Denso International America Inc. of Southfield, Mich., with an $18.7 million trade claim.

Chrysler is an Auburn Hills, Mich.-based automotive company. Its Chapter 11 case number is 09-50002.

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