They almost had it. Under the wire and working with the Obama administration, Chrysler nearly avoided the recent announcement they will be forced to file for Chapter 11 Bankruptcy.
In a bid for further government loans, Chrysler worked a cost-cutting deal with the United Auto Workers and agreed to form an alliance with Fiat. Meanwhile, the Treasury Department coaxed four banks that hold the majority of Chrysler’s $6.9 billion of debt to settle for $2 billion in cash.
That left about 40 hedge funds that hold roughly 30 percent of Chrysler’s debt to be dealt with, but the creditors said the same deal that the banks agreed to did not suit them, and that they would hold out for more money.
A person briefed on the dealings with the creditors said the Treasury Department and the four banks then offered the creditors an additional $250 million in cash, a total of $2.25 billion, but the creditors said that it would still be in their best interest if Chrysler went bankrupt so some of the company's assets could be sold to repay the debt owed to them.
“They were hoping that everybody else would have to make sacrifices, and they would have to make none,” Obama said in the press conference announcing Chrysler’s bankruptcy, “I don’t stand with them.” “I don’t stand with those who held out when everybody else is making sacrifices.”
Obama said that the UAW, who had already made “painful concessions,” agreed to further cuts in wages and benefits that would help save union jobs and ensure about 170,000 retirees and their families keep their health care. He also praised Chrysler’s efforts in their attempts to restructure.
“Chrysler's’ management, and in particular its CEO, Robert Nardelli, have played a positive and constructive role throughout this process,” he said. (1)
- Robert Nardelli said he would step aside as CEO of Chrysler after the company recovers from Chapter 11 bankruptcy. Despite media skepticism, Obama said the bankruptcy process should only take 30 to 60 days.
“Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat,” Nardelli said in a statement. “I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance.” (2)
-Chrysler will become Fiat-Chrysler with Fiat holding an initial 20% stake in the new company.
The new board of directors will consist of four members appointed by the U.S. Treasury, three of which will be “independent” members. Fiat will pick three members, two of which will be independent.
The Canadian government will appoint one seat (Fiat has a large presence in Canada and close ties to the Canadian Auto Workers). The UAW will name one member as part of a deal to take equity instead of cash for half of the $10.6 billion that Chrysler owed to a UAW-administered trust intended to pay for retiree health care.
As part of the alliance, Fiat said it would be allowed to appoint another board member after it meets three benchmarks set in place on a path to reach a maximum 35 percent stake in Chrysler. Fiat will not be allowed to gain a controlling interest in Chrysler until their efforts help repay nearly $7.5 billion of the new federal loans that will be granted to Chrysler since they filed for bankruptcy.
Fiat’s three official tasks designed to repay the loans include:
1. Help Chrysler sell more vehicles outside of North America.
2. Introduce a fuel-efficient engine to be manufactured in the United States.
3. Introduce a 40-mpg vehicle also manufactured in the United Sates.
The new engines and cars Chrysler-Fiat produces will wear the Chrysler badge, but be more efficient with the introduction of Fiat’s fuel-saving technologies. (3)
President Obama stressed that Chrysler’s unprecedented Chapter 11 filing should not be viewed as a failure, but a necessary step towards recovery.
“I have every confidence Chrysler will emerge from this process stronger and more competitive,” he said.