Chrysler Headed For Bankruptcy?

by Chris Sturr | April 23, 2009

The NYTimes is reporting that the government is preparing a Chapter 11 bankruptcy (reorganization) filing for Chrysler. The filing itself could come as soon as next week.

Union health care and pension benefits would remain protected and a potential deal with Fiat could still be worked out under the filing. A major sticking point, however, will be how to deal with the company’s creditors, who hold nearly $7 billion in debt. The government has offered the creditors 22 cents on the dollar and a 5% equity stake. The lenders had earlier proposed receiving 65 cents on the dollar and a 40% equity stake. If no agreement is reached, the matter will likely head to the courts.

From the Times:

The U.A.W., Chrysler and Treasury have reached agreements in principle that would protect workers’ benefits, people with knowledge of the negotiations said, and a similar agreement is expected to be reached as soon as this weekend with the Canadian Auto Workers union.

Once Chrysler emerges from bankruptcy protection, it would largely be owned by Fiat, the U.A.W., the Treasury and its lenders, these people said. A bankruptcy filing would likely wipe out existing equity stakeholders, notably Cerberus Capital Management, which took over the carmaker from Daimler in 2007.

Ron Gettelfinger, the U.A.W.’s president, issued a statement on Wednesday saying that the union was “continuing to work toward an agreement that will be in the best interest of Chrysler workers, retirees and the communities where the company does business.”

People close to the talks said Wednesday that the U.A.W. had tentatively agreed to accept Chrysler stock to finance half of the company’s $10.6 billion obligation to the health care trust. The balance would be paid in cash over the next decade. That money presumably could come from either the Treasury, or from Chrysler’s profits, once it emerges from bankruptcy protection.

Chrysler has a $9.3 billion pension shortfall, or 34 percent of its total liability, according to the Pension Benefit Guaranty Corporation. The agency said earlier this month that it would assume $2 billion of the shortfall in the event Chrysler terminates its pension plans.

If that happened, retirees would receive sharply lower benefits than they normally would expect. But Chrysler is not obligated to terminate its pension plans while in bankruptcy, particularly if it received federal assistance to fund them.

It was not clear Thursday where Chrysler would file its bankruptcy case. On Wednesday, Mike Cox, the attorney general of Michigan, urged General Motors and Chrysler to consider filing in the state, rather than Delaware or New York. He said a locally administered case would be more convenient for creditors in Michigan.

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  1. Chrysler Files Bankruptcy – Assessing The Financial Carnage. Here is a very cogent legal analysis of where the Chrysler chips may fall. Looks like the Judge will have to determine if the deal has any sub rosa plots. http://pfx.me/KM

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