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Chrysler on brink of securing a Fiat deal: Bankruptcy Uncertain a Day Before Task Force Deadline

By Amarendra Bhushan for CEOWORLD Magazine Updated:April 29, 2009

Chrysler’s path to recovery cleared a major roadblock ahead of Thursday night’s government-imposed deadline when the struggling automaker’s largest bondholders agreed Tuesday to significantly reduce its debt.

That deal and the expectation that the United Auto Workers will ratify a labor pact Wednesday increase the likelihood that Italian automaker Fiat will buy Chrysler and save it from financial collapse.

But even if Fiat takes over, Chrysler might still enter government-backed bankruptcy to resolve some of its toughest outstanding issues, including a sharp reduction of its 3,300 U.S. dealers.

Negotiations continue involving members of President Barack Obama’s auto task force, Fiat and a host of parties as they try to steer clear of bankruptcy, which could scare away car buyers.

The Treasury Department reached a preliminary deal Tuesday with the four entities that hold about 70 percent of Chrysler’s debt – Citigroup, Goldman Sachs, JP Morgan Chase and Morgan Stanley. The deal calls for all of Chrysler’s bondholders to swap the $6.8 billion they are collectively owed for $2 billion in cash when a Fiat deal closes, according to the person familiar with the talks.

- United Auto Workers could soon hold a majority of teetering Chrysler LLC, but their Canadian counterparts won’t own any shares under the company’s survival plans.

- United Auto Workers will own about 55 per cent of Chrysler LCC.

- In exchange, the company would no longer be liable for significant obligations under a multi-billion-dollar retiree health-care fund.

- Fiat SpA will hold another 35 per cent.

- while the U.S. government and lenders would own the remaining.

Although he made a “commitment” to Chrysler’s Canadian operations, Fiat CEO Sergio Marchionne believes a Chapter 11 bankruptcy filing by the Detroit automaker “may be inevitable,” Canadian Auto Workers president Ken Lewenza said Tuesday.

Lewenza and Marchionne met for the first time Monday near Toronto for two hours after the head of the Italian automaker flew in from Washington, where he was holding last-ditch negotiations for a strategic alliance with the ailing Detroit automaker. The two companies have until Thursday to finalize a merger.

The Obama administration extracted deep concessions from holders of Chrysler’s $6.9bn debt yesterday, buying time for the US carmaker to agree on a survival plan.

Four lenders who hold about 70 per cent of the debt agreed in principle that all the debt be swapped for $2bn in cash, paving the way for a restructured Chrysler, which will be part-owned by Fiat, the Italian carmaker.

Two Fiat executives told the Financial Times they expected the Italian group to sign a partnership with Chrysler tomorrow. This was the deadline set by Washington’s auto task force for a deal with the United Auto Workers union, creditors and Fiat. A separate person familiar with the talks said he was “cautiously optimistic” that a deal would be concluded with Fiat.

A “surgical” bankruptcy remains an option, however, with the aim of forcing agreement from smaller banks or hedge funds resistant to the debt plan that has been agreed with JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup.

“The agreement from Chrysler’s principal banks is an exceptional accomplishment in line with the president’s [Barack Obama's] firm commitment that all stakeholders sacrifice to make this deal succeed,” said an administration official, ft reported.

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