Why Chrysler Still Might Not Survive

U.S.News & World Report
Why Chrysler Still Might Not Survive
Thursday April 30, 3:31 pm ET

By Rick Newman



Give President Obama credit for his boldest bailout plan yet. Unlike some of the open-ended bank bailouts, his Chrysler plan makes hard choices, sets public standards and deadlines, and puts some burden on stakeholders besides the U.S. government. By forcing Chrysler into bankruptcy, Obama has committed to a process that will determine winners and losers and force concessions on those unwilling to make them voluntarily.

But Obama's claim that bankruptcy gives Chrysler a "new lease on life" may be wishful thinking. Bankruptcy reorganization and a Fiat merger might be Chrysler's best chance for survival, but the "New Chrysler," as the administration calls it, could end up being no more successful than New Coke, one of the biggest business flops ever. Here's why:

No cars.
Obama praised Chrysler's accomplishments in cutting tough deals with its unions and most of its creditors. But it takes compelling cars to succeed in the car industry, and Chrysler still has few. The Fiat merger is supposed to give Chrysler new versions of some popular Fiat vehicles, like the 500 compact car. Okay, great. But unless Obama takes the unusual step of waiving U.S. safety and environmental laws, it will take well over a year for such cars to be retrofitted for the U.S. market - and even longer before they're actually built here, which is one of the conditions the new company must meet to get up to $8 billion in additional aid. For the next 12 months at least, Chrysler will still be offering the same lineup of inefficient, underperforming vehicles, and losing market share the whole time.

Small margins.
The last two years have proven that every successful automaker needs a stable of competitive small cars - one of Fiat's strengths - but those are just part of the formula. Small cars tend to have small profit margins, no matter how many you sell, which is why it's vital to have compelling larger vehicles, too. Chrysler's 300 sedan was a big hit, but it's near the end of its lifecycle, and few of Chrysler's other big vehicles are tops in their segment. When the car market was going gangbusters, a few hits in the lineup could make up for a few duds. But with industry sales down 40 percent from their peak, every vehicle needs to pull its own weight, and even a combined Chrysler-Fiat fleet doesn't seem to have enough standouts.

Lots of competition.
The revitalized Chrysler is hardly the only company planning to introduce hot new small cars that will take the market by storm. Chevrolet has the Cruze. Ford has the Fiesta. Toyota, Honda and Nissan already build some of the best small cars, and they're certainly not planning to give up their huge edge in the segment. So even if the 500 and a couple other Fiats are big hits when they arrive in America, the competition is only going to intensify. And other makes already in the market have a key first-mover advantage.

Convoluted ownership.
If the Obama plan goes as expected, Chrsyler will emerge from bankruptcy being jointly owned by the United Auto Workers, Fiat, and the U.S. and Canadian governments. Those vastly different entities share a common cause for the moment - saving a big North American employer and using its infrastructure as a springboard for Fiat. But it's hard to imagine a more awkward ownership structure for something as complex as a car company. The U.S. government and the UAW? The U.S. government and the Italians? Will they really maintain a unified focus for as long as it takes for Chrysler to repay up to $12 billion in federal loans and get out of the government's clutches? Chrysler's failed 9-year marriage to Germany's Daimler AG is a poignant reminder of how difficult it can be to hold together a sprawling operation when the biggest stakeholders have diverging interests.

Ford.
There's one domestic automaker positioned to benefit from the woes at Chrysler and General Motors. Ford is still nursing its own string of deep losses -- but doing so without government aid or the stigma associated with bankruptcy. And as it turns around its own operation, Ford has started to slowly gain market share, largely at the expense of its crosstown rivals. Ford could make further gains as Chrysler works through bankruptcy, and GM approaches it. Obama has pledged government backing for the warranties on all Chrysler and GM products, but buying from a solvent automaker still beats taking your chances on a fuzzy government guarantee. That's old-fashioned capitalism, which may yet play a role in the historic realignment of the automakers.

http://biz.yahoo.com/usnews/090430/30_why_chrysler_still_might_not_survive.html;_ylt=Ak4I9f5eS163H2qBgdj9syy7YWsA?.&.pf=loans

Chrysler driven into bankruptcy

Chrysler driven into bankruptcy

Chrysler became the first major car manufacturer to file for bankruptcy in the current recession after last-minute negotiations between the US government and a batch of dissident hedge fund creditors broke down.

By James Quinn, Wall Street Correspondent
Last Updated: 9:20PM BST 30 Apr 2009

But, at the same time, Chrysler entered into a strategic partnership with Italian rival Fiat designed to safeguard its long-term future and give it access to fuel-efficient technologies and smaller car designs.

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The developments – which followed months of negotiations by Barack Obama’s automotive task force – herald a new chapter in the 84-year-old company’s history. A chapter which will ultimately see it controlled by Fiat and the United Auto Workers (UAW) union.

The collapse followed an 11th-hour stand-off between the US automotive task force and 20 hedge and distressed debt funds which control $1bn (£676m) of Chrysler’s $6.9bn debt. The funds refused to accept a deal which would have seen them paid only 44pc of what they are owed.

The dissident funds, including Oppenheimer Funds and Perella Weinberg’s Xerion Capital Fund, stood firm after alleging they were being unfairly treated in favour of government funded banks such as JP Morgan Chase and Goldman Sachs, who are among Chrysler’s biggest creditors.

President Obama reprimanded the hedge funds, saying he could not support “a group who held out for the prospect of an unjustified taxpayer bailout”. He added that some “demanded returns twice what others were getting”. The attack was a negative moment in an otherwise highly positive statement, in which he called Chrysler one of the companies that “helped make the 20th century the American century”.

The car maker has been given a “new lease on life” as a result of the deal with Fiat, the President said. He added that the company’s move into Chapter 11 will be “quick ... efficient ... and controlled” and “will not disrupt the lives of those who work at Chrysler.”

The alliance with Fiat will safeguard 30,000 jobs at Chrysler, tens of thousands at suppliers and dealers, and guarantee the healthcare rights of 170,000 retired Chrysler workers and their families.

Chrysler was last night due to file for Chapter 11 bankruptcy protection in New York, a process which will allow a bankruptcy judge to approve its restructuring plan, which has the support of employees, unions, and 70pc of creditors by value.

Obama administration officials described the bankruptcy process as “purely surgical”, saying it would take 30-60 days for the new Chrysler to re-emerge.

Filing for bankruptcy will allow Chrysler to access $3.3bn in new debtor-in-possession financing from the US government, intended to ensure it can operate as normal through the process, as well as $4.7bn in US loans on exiting Chapter 11, on top of $4bn already loaned back in December. The Canadian and Ontario governments will provide a further $2.42bn.

In return, on formation of the new Chrysler, the US government will own an 8pc stake — and its Canadian counterparts a 2pc stake — and will be able to nominate five directors between them.
Fiat will get a 20pc stake in the new company to begin with, but President Obama stressed the Italian company will not be allowed to take a majority stake until “every taxpayer dime” has been repaid. UAW, will have a 55pc stake.

http://www.telegraph.co.uk/finance/newsbysector/transport/5252690/Chrysler-driven-into-bankruptcy.html

Obama tells carmakers to shape up or face bankruptcy

March 31, 2009

Investors get the jitters as Obama tells carmakers to shape up or face bankruptcy



Christine Seib in New York


President Obama's warning yesterday that he would not hesitate to put General Motors (GM) and Chrysler into bankruptcy slashed the price of the American carmakers' debt and pushed insurance against its default higher.

GM bonds maturing in 2033 and paying 8.375 per cent dropped 2.75 cents to 16 cents in the dollar.

Phoenix Partners Group said that buyers of a five-year credit default swap on GM debt would pay 80 per cent of the sum insured up front, plus 500 basis points a year, up from 77 per cent on Friday.

Term loans to Chrysler's automotive business were trading lower. Even Ford, which has not asked the US Government for a bailout, saw its debt drop slightly.

The President has given GM 60 days and Chrysler only 30 days to slash debt and hit other targets or face the bankruptcy courts. Even after talks lasting months, GM and, to a lesser extent, Chrysler had previously failed to convince their lenders to accept a smaller repayment than they are due. However, despite Mr Obama's threats, experts do not expect bondholders to roll over. Some may prefer to take their chances in the bankruptcy courts rather than accept the existing offer from the car companies.

Doug Harvey, partner in the automotive division at AT Kearney, the consultancy, said: “Bondholders traditionally are gamblers and aren't afraid to call a bluff.”

Under the terms announced by the White House yesterday, GM has 60 days to negotiate with its bondholders to cut its $28 billion unsecured debt by two thirds. The company has a relatively small amount of secured debt. The carmaker wants its unsecured bondholders to accept as much as 90 per cent of the equity in the reorganised company, plus some cash and new unsecured notes. The bondholders want the Government to guarantee this new debt.

It is not clear how much of the value of bondholders' investments is wiped out under the terms suggested by GM, but Standard & Poor's, the ratings agency, describes the offer as a “distressed exchange”, indicating that the value of the debt was now substantially below par.

After the Government's announcement, a bond analyst said: “Bondholders as a group will now need to decide whether they accept a distressed exchange outside the bankruptcy court or pursue remedies in court.”

If GM was to be put into Chapter 11, bondholders could argue that they should be allowed control of the company, be repaid via the sale of some assets or even the sale of the whole company.

This may result in a payout not substantially less than is currently on offer, but takes the control from the bondholders and puts it into the hands of a judge - a risky strategy.

Mr Obama has made clear that any bankruptcy proceedings will be closely overseen by the Government. This does not bode well for bondholders, who have already been described by Steve Rattner, the President's adviser on the car industry, as less constructive than he would like.

Analysts at Credit Suisse said that the Government may use the bankruptcy proceedings to put itself above unsecured lenders in any future payout, in order to protect taxpayers' funding that it supplies to GM.

Fritz Henderson, GM's new chief executive, indicated that President Obama's support for GM made it more likely the company would file for bankruptcy. "Whether out of court or in court, either way, they'll be there to support us," he said.

A statement from a committee of GM's bondholders said that they would prefer that the carmaker did not go into Chapter 11.

"Bondholders did not cause GM’s problems ... but are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity," the statement said.

http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article6005600.ece