Iconic U.S. auto maker Chrysler LLC on Thursday filed for
bankruptcy protection at the behest of the U.S. government after
failing to reach an agreement with a small group of creditors.
Italy's Fiat SpA (FIATY), as part of the process, will take a
small stake in Chrysler initially but could eventually take control
of the U.S. auto maker.
The administration, which led the crisis talks because it is
providing essential cash to the car company, expects a quick
bankruptcy proceeding to be wrapped up in as little as 30 to 60
days.
"This process will be quick, it will be efficient," said U.S.
President Barack Obama in a television address.
The government, which has already provided billions of dollars
to Chrysler, said Thursday it would commit a further $8 billion to
help the company through bankruptcy.
Market reaction to the troubles of such a major company were
subdued, as this possible outcome had been well signaled since the
end of March, when President Obama set a May 1 deadline for
Chrysler to strike tough deals with creditors and employees. Big
banks had already substantially written down their Chrysler debt
and won't have to take drastic remedial action, which also soothed
investors.
Stock markets were steady, with the Dow Jones Industrials
Average unchanged on the day at around 8198 points, but the auto
stocks including those of Ford Motor Co. (F) and General Motors
Corp. (GM) surged, as the orderly bankruptcy process brightened the
outlook for the industry.
A bankruptcy court in the Southern District of New York will
handle the restructuring plan, which could be easier to push
through because, unlike the out-of-court talks, it doesn't need
approval of all parties. Large creditors, including U.S. banks
JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Morgan Stanley
(MS) and Goldman Sachs Group Inc. (GS), had supported the
government's proposal to give lenders $2 billion in cash for the
forgiveness of $6.9 billion in loans.
During his noon address, President Obama took a tough stance
against what he described as the small group of "speculators" which
had held up the Chrysler restructuring. The bankruptcy proceedings
are "designed to deal with those last few holdouts," Obama
said.
The holdouts, largely hedge funds, said in a statement released
Wednesday before the president's address that they questioned the
administration's willingness to negotiate, saying their own offer
was "flatly rejected or ignored."
If the court plan is approved, Chrysler's car-making operations
would be sold to a new company, which would emerge from bankruptcy
under entirely new ownership and without onerous obligations to
creditors and employees.
The existing shareholders, Cerberus Capital Management LP and
Daimler AG (DAI), would lose all their holdings, and a health-care
trust fund for retirees, the Voluntary Employee Benefit
Association, would emerge as the new majority owner, with a 55%
stake.
Fiat on Thursday agreed to a partnership with Chrysler, under
which it will initially receive a 20% stake in the U.S. company.
That stake could rise to 35% if certain targets are met; the
Italian company also has an option to become a majority stakeholder
once the U.S. loans have been repaid.
The U.S. Treasury Department, meanwhile, will own 8% of
Chrysler, and the governments of Canada and Ontario, which will
provide $2.4 billion in financing, will hold a combined 2%
stake.
The company's 54,000 employees and its 115,000 retirees,
represented by the United Auto Workers' union, late Wednesday
approved their part of the bargain, eliminating a number of
benefits.
While the court plan is being worked out, Chrysler said most
manufacturing operations will be suspended Monday and will resume
once the transaction is completed. Further layoffs aren't expected
at this point, although, once the agreement with Fiat goes through,
more cost-cutting measures may be needed.
Chrysler said its operations in Mexico and Canada and other
international operations aren't part of any bankruptcy filing.
Shortly after the president's speech, Chrysler Chief Executive
Bob Nardelli said he would resign, returning to work for Cerberus,
which had appointed him to run the company in August 2007.
As part of the deal, GMAC Financial Services, GM's financing
arm, will provide financing for Chrysler dealers and customers.
The U.S. government tried to head off accusations that it is
meddling too deeply in the economy, and in the auto industry in
particular, by stressing its role as an investor, rather than as a
manager.
"The government has a major investment in this company and it is
overseeing its investment," said a senior administration official.
"The company is being run by its management team and it will
continue to be run by its management team."
Once the dust has settled, the administration will "try to look
ahead and plan for the government's eventual exit as an equity
holder," the official said.
-By Matthew Cowley, Dow Jones Newswires; 201 938 5692;
matthew.cowley@dowjones.com