Chrysler, an 84-year-old symbol of America’s manufacturing might, has filed for Chapter 11 bankruptcy in an unprecedented move announced Thursday by President Barack Obama.
The historic filing is the first for one of Detroit’s Big Three. But it’s not the end of the road for Chrysler, which will continue sales and has reached an agreement to partner with Italian auto giant Fiat, Obama said in a televised address from the White House.
The bankruptcy comes after Chrysler failed to reach an agreement with all of its debt holders. A small group of debt holders had balked in hopes of getting a better deal.
Although bankruptcy--no matter how short--is sure to send ripples throughout the car world, Obama hopes it will lead to a brighter future for Chrysler.
“This is not a sign of weakness but one more step on a charted plan for survival,” the president said.
Chrysler hopes to emerge from bankruptcy in 30 to 60 days and will immediately ask the court to approve its agreement with Fiat. After the bankruptcy, Chrysler CEO Bob Nardelli will step down and become an adviser with Cerberus Capital Management, the private equity firm that will likely walk away from Chrysler under a new ownership structure.
Most of Chrysler’s plants will shut down on May 4 and likely will resume production in 30 to 60 days. The remade company will keep selling vehicles under its existing brands, its dealerships will remain open, and warranties--to be backed by the U.S. government--will remain in effect.
“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,” Nardelli said in a statement.
“My No. 1 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. “
Obama also announced that financing for Chrysler cars will be available through GMAC, after determining that Chrysler Financial did not have the resources to meet the automaker’s lending needs.
Chrysler did reach deals with most of its debtors--three firms were believed to be the holdouts--and ironed out an agreement with the UAW that will give the union a 55 percent ownership stake in the remade automaker.
“The necessary steps have been taken to give one of America’s storied automakers a new lease on life,” Obama said.
A trip through bankruptcy is expected to be quick for Chrysler, as most of its crushing debt load has already been relieved. In court, the company is expected to be able to make further reductions in its dealer count and other structural costs that will allow it to be more competitive amid the global economic downturn.
Fiat’s role
Fiat is expected to get a share of Chrysler that could grow to 35 percent and give the Auburn Hills, Mich., automaker access to Fiat’s engines and platforms. The Italian company has agreed to build one car in a Chrysler factory in the United States.
Fiat will initially get 20 percent of Chrysler and will be allowed to increase that in increments of 5 percent when it does each of the following:
-- Brings a platform that will underpin a car capable of 40 mpg for Chrysler to the United States.
-- Provides a fuel-efficient engine family to be produced here.
-- Gives Chrysler access to Fiat’s vast global distribution network to help grow the American company’s currently small overseas presence.
"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," Fiat CEO Sergio Marchionne said 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.”
Marchionne could have an active role in running the remade Chrysler, and Fiat will be able to appoint three of the company's new, nine-member board. Four members will be appointed by the Treasury Department, one by the Canadian government and one by the UAW.
Former Chrysler partner Daimler also unloaded its holdings in the automaker this week.
The federal government will lend Chrysler more money--it’s currently surviving on U.S. loans--but the loans will have to be repaid before Fiat can take a controlling stake in the American company.
In his address, Obama praised a number of groups, including unions, debtors and former owners, for agreeing to cutbacks--and he singled out the bondholders who refused to agree to terms.
“I don’t stand with those who held out when everybody else made sacrifices,” the president said.
Bankruptcy
The historic move by an American automaker was filed in federal court in New York. The government will provide financing, known as debtor-in-possession, to allow the company to continue to function while in reorganization. The filing includes 24 Chrysler subsidiaries in the United States but not its Canadian, Mexican or other international operations.
The plan is for most of Chrysler’s principal assets to be sold to a “new” company, with the less viable ones wiped away.
Cerberus reacts
The New York-based private investment firm is expected to exit Chrysler, after buying a mjaority stake in 2007 from Daimler. It issued the following statement from Mark Neporent, Cerberus chief operating officer and general counsel:
"Cerberus has worked diligently with the U.S. Department of Treasury, Mr. Bloom, Mr. Rattner and the other members of the President's Auto Task Force, Fiat, the UAW, the Lenders and all major constituencies to facilitate the restructuring of Chrysler, LLC. We appreciate the support for Chrysler LLC reflected in the tireless work of its management team led by Bob Nardelli, Tom LaSorda and Jim Press, and the efforts of The Treasury, the Auto Task Force and all stakeholders to preserve and enhance the viability of Chrysler LLC. We are optimistic that Chrysler's Chapter 11 case will lead to the expeditious and efficient completion of the restructuring that has been agreed upon by the major stakeholders, and we will continue to do all that we can do to support a successful outcome."
CHRYSLER'S PRESS RELEASE
Chrysler LLC and Fiat Group Announce Global Strategic Alliance to Form a Vibrant New Company
Auburn Hills, Mich., Apr 30, 2009 - Chrysler LLC today announced that, as a result of the comprehensive restructuring plan agreed to by many of its stakeholders, it has reached an agreement in principle to establish a global strategic alliance with Fiat SpA to form a vibrant new company. It will allow Chrysler and Fiat to fully optimize their respective manufacturing footprints and the global supplier base, while providing each with access to additional markets. Fiat powertrains and components will also be produced at Chrysler manufacturing sites.
"This partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages,” said Bob Nardelli, Chairman and CEO of Chrysler. “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."
Chrysler initiated 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. Chrysler and many of its stakeholders worked tirelessly to agree upon concessions that will result in a significantly lower cost base and enable fulfillment of a broader strategic alliance.
“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. Chrysler employees will become employees of the new company. Chrysler dealerships remain open for business serving our customers. All vehicle warranties will be honored without interruption and consumers can continue to purchase our vehicles with complete confidence,” explained Nardelli.
Despite substantial progress on many fronts, Chrysler was not able to obtain the necessary concessions from all of its lenders, which would have avoided the need for a bankruptcy proceeding. As a result, under the direction of the U.S. Treasury, Chrysler LLC and 24 of its wholly owned U.S. subsidiaries today filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Southern District of New York.
“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,” said Nardelli. “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. “
Chrysler also will file a motion under Section 363 of the Bankruptcy Code requesting the swift approval by the Court of the agreement with Fiat and the sale of Chrysler’s principal assets to the new company. The benefit of this type of filing is speed. It should allow a leaner new company to emerge in a matter of 30 to 60 days, well positioned for long-term viability.
Nardelli, who has been leading Chrysler since August 2007, also announced to Chrysler LLC’s Board of Management and the U.S. Treasury his plan to leave the company following the emergence of the new company from Chapter 11 and the completion of the alliance with Fiat. He will return to Cerberus Capital Management LP as an advisor. “Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat,” said Nardelli. “I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance.”
During the restructuring process, the government will provide sufficient debtor-in-possession (DIP) financing to allow continuation of “business as usual.” The company will seamlessly honor warranty claims, pay suppliers and keep our dealer body operating to continue to serve our valued customers.
“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,” said Nardelli.
Chrysler’s Mexican, Canadian and other international operations are not part of any bankruptcy filing.
As part of the restructuring and with the backing of the U.S. Treasury, we have reached an agreement in principle with GMAC to become the preferred lender for Chrysler dealer and consumer business. GMAC will be able to offer the best long-term finance options for Chrysler dealers and customers with standard rate installment products.
When the transaction is completed, the Voluntary Employee Beneficiary Association (VEBA) will own 55 percent of the new company and the U.S. and Canadian governments will own proportionate shares of a 10 percent stake. Fiat will initially hold a 20 percent ownership stake in Chrysler. Fiat will have the right to increase its ownership stake an additional 15 percent in three increments as it meets the following criteria: 5 percent for bringing a 40 mpg vehicle platform to Chrysler to be produced in the U.S.; 5 percent for providing a fuel-efficient engine family to be produced in the U.S. for use in Chrysler vehicles; and 5 percent for providing Chrysler access to its vast global distribution network to facilitate the export of Chrysler vehicles. Fiat cannot become a majority owner until after all U.S. government loans have been completely repaid.
As a part of the restructuring, most manufacturing operations will be temporarily idled effective Monday, May 4, 2009. Normal production schedules will resume when the transaction is completed, which is anticipated within 30 to 60 days.
“We want to recognize the Administration, the U.S. Treasury, President’s Auto Task Force, as well as Members of Congress and representatives at the state and community level and Canadian Federal and Ontario Provincial governments for their energy and efforts in helping to move this new company forward," Nardelli said. “It is also important to acknowledge Cerberus and Daimler, which provided the foundation for the alliance as well as Chrysler’s many other stakeholders including the UAW and CAW leadership, employees, dealers and suppliers. Without their deep sacrifices, unstinting loyalty and enduring belief in Chrysler, the alliance would not have been possible. We look forward to our new partnership with Fiat. To be sure, there will be many changes as we move forward to implement our plans. But today, from many great parts, we begin to build a vibrant new company with less debt, a stronger balance sheet, richer product portfolio, supported by a well-positioned finance company.”
MORE REACTION
Ford Statement
Today’s announcement that Chrysler is filing for Chapter 11 bankruptcy is an important development during this unprecedented period for the auto industry and the global economy.
Our teams are monitoring the situation and have been working hard for months to ensure that the external environment and industry restructuring do not slow progress on our Ford transformation plan, which remains solid and unchanged.
Importantly, we share President Obama’s hope that Chrysler’s bankruptcy will be controlled and quick, while we continue planning for all contingencies as a prudent business measure. Our industry is highly interdependent, and the health of the supply base and dealer network is critical for all automakers. Ford appreciates that the U.S. Automotive Task Force is focused on the stability of the supply chain and is committed to ensuring that a healthy U.S. auto industry emerges from this difficult economic period.
At this time, we do not expect any disruptions to our operations as a result of today’s news.
All of us at Ford remain absolutely committed to continuing to make progress on our transformation plan. Our greatest opportunity is to create ONE Ford, leveraging our global assets and delivering more high-quality, fuel efficient vehicles that customers want and value.
General Motors statement
We are deeply appreciative for President Obama's strong commitment and support of the American auto industry and its employees. Like him, we firmly believe that the best days of America's auto manufacturers--including Chrysler--lay ahead. GM remains focused on accelerating the speed of its operational restructuring and reducing the liabilities and debt on its balance sheet. We look forward to working with the President's Auto Task force to do so and are committed to transparent reporting of our restructuring every step of the way.
