Chrysler to File for Bankruptcy Following Collapse of Negotiations; President Obama to address the nation

April 30, 2009 at 9:45 am

(Source: Washington Post)

Chrysler, one of the three pillars of the American auto industry, will file for bankruptcy today after last-minute negotiations between the government and the automaker’s creditors broke down last night, an Obama administration official said.

 U.S. officials had offered Chrysler’s secured lenders $2.25 billion in cash if they would agree to writedown the $6.9 in secured debt that the company owed. But a small group of hedge funds refused the 11th-hour deal, forcing an imminent bankruptcy.

An administration official this morning expressed disappointment, saying the holdouts had failed to “do the right thing,” but that “their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders, nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward.”

President Obama is scheduled to address the issue at noon today at the White House.

As talks broke down late last night, it became near certainty that the Obama administration would send Chrysler into bankruptcy under a plan that would replace chief executive Robert L. Nardelli and pump billions of dollars more into the effort, all in hopes that the company could emerge from court proceedings as a re-energized competitor in the global economy.

The U.S. government’s attempt to save the automaker amounts to another extraordinary intervention in the economy and a landmark event in the history of the American auto industry.

Under the administration’s detailed plan for a “surgical bankruptcy,” ownership of Chrysler would be dramatically reorganized, the leadership of Italian automaker Fiat would take over company management and the U.S. and Canadian governments would contribute more than $10 billion in additional funding.

Negotiations between the government and the company’s stakeholders — Chrysler’s lenders, the union and proposed merger partner Fiat — went well into the night, as dealmakers rushed to meet President Obama’s April 30 deadline.

Last night, the United Auto Workers union overwhelmingly ratified the administration proposal to give its retiree health fund the 55 percent equity stake in Chrysler. In exchange, the health fund must give up its claim to much of the $10 billion that Chrysler owes it. Eighty-two percent of production workers and 80 percent of skilled-trades workers voted for the agreement.

While four of Chrysler’s major creditors — J.P. Morgan ChaseCitigroupGoldman Sachs and Morgan Stanley — have agreed to the Treasury’s plan, other lenders, mainly hedge funds, had held out. The holdouts included Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital, two sources said. The last two have funds that invest in “distressed” companies. It is not known what companies ultimately failed to reach agreement with the government.

The hedge funds likely think they could get a better return in a bankruptcy filing or in a sale of Chrysler’s assets, said Sheldon Stone, a turnaround expert at Amherst Partners. The government offer made yesterday would represent a recovery of about 32 cents on the dollar. A recent Standard & Poor’s analysis said the lenders could recover 30 to 50 cents on the dollar.

“Anyway you cut it, the union is going to be a major presence at the company,” Shaiken said.

One key issue, however, will be who appoints the restructured Chrysler’s board of directors.

The government’s bankruptcy plan envisions a company with nine board seats, three of them appointed by Fiat. It does not specify who would appoint the rest.

In April, Nardelli sent a letter to employees indicating that the U.S. government would play a key role.

“Upon successful completion of the alliance, a board of directors for Chrysler will be appointed by the U.S. government and Fiat,” he wrote. “The majority of the directors will be independent (not employees of Chrysler or Fiat).”

Negotiations between the government and the company’s stakeholders — Chrysler’s lenders, the union and proposed merger partner Fiat — went well into the night, as dealmakers rushed to meet President Obama’s April 30 deadline.

Bankruptcy enables a company to shed some debt and other obligations, and a court could force the recalcitrant hedge funds to accept the deal that the large banks have.

The court proceedings could also help the company cut the costs of closing some of its 3,200 Chrysler, Jeep and Dodge dealerships. Because some state franchise laws prevent automakers from forcing dealers to close, it can be expensive to buy them out. In bankruptcy, however, a judge could eliminate dealerships.

Fearing this prospect, the National Automobile Dealers Association has hired a law firm to protect Chrysler dealers in case of bankruptcy.