President Barack Obama announced Thursday that Chrysler would head into bankruptcy with the aid of up to another $8 billion in taxpayer money, a last-resort attempt to quickly restructure the struggling giant. He blasted hedge-fund creditors whom he said held out for a richer deal.
“No one should be confused about what a bankruptcy process means,” Obama said. “This is not a sign of weakness but rather one more step on a clearly chartered path to Chrysler’s revival.”
As part of the deal, Chrysler is signing a partnership with the Italian company Fiat. The government will be an investor in the revamped Chrysler and will help choose its new directors, but the Obama administration does not plan to help manage the company.
Bankruptcy doesn’t mean the nation’s No. 3 automaker will shut down. A Chapter 11 bankruptcy filing would allow a judge to decide how much the company’s creditors would get while the company continues to operate. The goal is for the whole process to happen quickly, Obama said, perhaps within a couple months.
The president said that Chrysler has been responsible for helping to build the American middle class, but over the years also had been weakened by “papering over tough problems and avoiding hard choices.”
“For too long,” Obama said at the White House, “Chrysler moved too slowly to adapt to the future, designing and building cars that were less popular, less reliable and less fuel efficient than foreign competitors.”
The Obama administration had long hoped to stave off bankruptcy for Chrysler LLC, but it became clear that a holdout group of creditors wouldn’t budge on proposals to reduce Chrysler’s $6.9 billion in secured debt. Obama praised all the constituencies that have offered sacrifices and blasted those that did not.
He said a group of investment firms and hedge funds were holding out for the prospect of an unjustified taxpayer bailout.
“I don’t stand with them,” Obama said at the White House event.
He called Chrysler one of the “most storied automakers” in the annals of the country.
Bankruptcy doesn’t mean the nation’s third largest automaker will shut down. And the privately-held Chrysler is expected to sign a partnership agreement with the Italian company Fiat as early as Thursday as part of its restructuring plan. A Chapter 11 bankruptcy filing would allow a judge to decide how much the company’s creditors would get.
The developments come as Chrysler rival General Motors Corp. is working on its own restructuring plan. GM’s bondholders said Thursday they want a majority stake in a restructured GM in exchange for forgiving their claim to $27 billion of that automaker’s debt. GM has proposed giving the U.S. government a 50 percent equity stake in exchange for about $10 billion in loan forgiveness. GM faces a June 1 deadline to get a restructuring plan in place.
The Treasury Department’s auto task force has been racing in the past week to clear the major hurdles that prevented Chrysler from coming up with a viable plan to survive the economic crisis ravaging nation’s automakers.
Along with the Fiat deal, the United Auto Workers ratified a cost-cutting pact Wednesday night. Treasury reached a deal earlier this week with four banks that hold the majority of Chrsyler’s debt in return for $2 billion in cash.
But the administration said about 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through. Those creditors said the proposal was unfair and were holding out for a better deal.
“While the administration was willing to give the holdout creditors a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler’s future success,” said one of the administration officials.
A third person briefed on Wednesday night’s events said the Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. But in the end, this person said most thought they could recover more if Chrysler went into bankruptcy and some of its assets were sold to satisfy creditors. This person asked not to be identified because details of the negotiations have not been made public.
On Thursday, a group of funds identifying themselves as 20 of Chrysler’s “non-TARP lenders” released a statement saying they had been sidelined during negotions between lenders and the government. The group, which said it holds $1 billion in Chrysler debt, complained that the four banks were “obviously conflicted” because they had accepted money from the government’s Troubled Asset Relief Program while they had not gotten TARP money.
“As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help,” the group said. “Indeed, we have made significant concessions toward this end — although we have been systematically precluded from engaging in direct discussions or negotiations with the government.”
The group said its offer to the Treasury Department to reduce its claim to 40 percent was “flatly rejected or ignored,” and added that it continued to discuss its position with Treasury.
When it files for bankruptcy, Chrysler would continue operating and Fiat would still sign on as a partner on Thursday, the people said. The government already has promised to back Chrysler’s warranties in an effort to allay customers’ fears that the automaker wouldn’t be around to honor them.
President Barack Obama’s auto task force in March rejected Chrysler’s restructuring plan and gave it 30 days to make another effort, including a tie-up with Fiat. The company has borrowed $4 billion from the federal government and needs billions more to keep operating. President Obama said Wednesday night while the lender talks were still ongoing that he was “very hopeful” that deals can be worked out to keep Chrysler LLC a viable automaker, and more hopeful than he was a month ago that the company will stay in business.
The UAW agreement, which would take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler’s U.S. facilities and to share key technology with Chrysler.
Meanwhile, the Fiat partnership means Chrysler CEO Robert Nardelli could be out of a job. In an April e-mail to employees, he said that if the deal is completed, Chrysler would be run by a new board appointed by the government and Fiat. The new board, Nardelli wrote, would pick a CEO “with Fiat’s concurrence.”
Sergio Marchionne, CEO of the Italian automaker, told reporters earlier this month that he could run Chrysler. Obama said Wednesday that Fiat’s management “has actually done a good job transforming their industry.”