Chrysler to File for Bankruptcy

by Chris Sturr | April 30, 2009

The big banks went for the deal, but the hedge funds wouldn’t budge. Now it’s headed for bankruptcy court.

From the BBC:

US carmaker Chrysler will file for Chapter 11 bankruptcy protection immediately and has formed an alliance with Fiat, President Obama has said.

Chapter 11 protects firms from their creditors, allowing them to rearrange their finances while still trading.

Some Chrysler dealerships will close over time but no jobs will be lost in the short term, President Obama said.

The move came after talks had broken down with Chrysler’s lenders late on Wednesday, the White House said.

Chrysler will receive a further $8bn (£5.4bn) in government loans, up from the $6bn the Treasury had promised it if it had successfully restructured the business by midnight.

The White House described the move as a “surgical short bankruptcy” which should last between 30 and 60 days.

President Obama said the “necessary steps” had been taken to give Chrysler “a new lease of life”.

He added that he had “every hope” that Chrysler will become “stronger and more competitive”.

New Chrysler

The filing for bankruptcy protection will lead to the forming of a new corporate entity.

Details of the new Chrysler include:

• Fiat will take a 20% stake, with the possibility of it rising to 35%

• The Treasury will have an 8% stake, a union-run trust fund VEBA will take a 55% stake, and the governments of Canada and Ontario will gain a combined 2% stake

• Current owner Cerberus will forfeit its 80.1% stake

• Daimler will give up its remaining 19.9% stake in Chrysler

• Chrysler bondholders will receive $2bn in cash in exchange for forgiving their $6.9bn debt.

‘Hedge fund block’

The deal will need to be ratified by the bankruptcy court.

While Chrysler’s main banks, holding 70% of the debt, accepted this proposal, it was rejected by hedge funds that hold a sizeable proportion of its remaining debt. Hedge funds are private investment funds that typically attract rich private investors.

A White House official accused the hedge funds of a “failure to act in either their own economic interest or the national interest”.

He added that their rejection of the deal would not impede “the new opportunity Chrysler now has to restructure and emerge stronger going forward”.

Chrysler is owned by private equity firm Cerberus Capital Management, which bought an 80.1% stake from Germany’s Daimler for 7.4bn euros ($9.9bn; £6.6bn) in 2007.

Cerberus will forfeit its stake as part of the deal.

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