Bankruptcy best exit strategy for Chrysler?

Chrysler is expected to declare Chapter 11 bankruptcy within the next 24 hours, reports the New York Times. Just two days ago, the troubled manufacturer and the US Treasury Department had convinced major creditors to accept US $2 billion in lieu of the US $6.9 billion owed, according to Automotive News.

But Chrysler and the Treasury Department have been unable to convince all the creditors to enter into a like agreement with the manufacturer, says the NYT. As it stands then, the newspaper predicts that Chrysler will file for Chapter 11 proceedings, protecting it from further legal action by the creditors ahead of entering into a cooperative agreement with Italian car maker Fiat.

Agreement by all the creditors to the $2 billion offer -- subsequently increased to $2.25 billion -- would have provided Chrysler with the opportunity to retire the majority of the $6.9 billion debt and restructure the company along leaner lines without going to bankruptcy court.

Under the terms of Chapter 11, the 46 lenders owed money will be forced to accept the original offer of $2 billion, rather than the later offer. Of the 46 lenders, the four major creditors that agreed to both the original offer and the subsequent one are all banks (JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley) and own 70 per cent of the car manufacturer's secured debt. The other creditors are predominantly hedge funds.

US President Barak Obama was quoted in the NYT article as saying that he was "actually very hopeful, more hopeful than I was 30 days ago, that we can see a resolution that maintains a viable Chrysler automobile company out there".

"The fact that the major debtholders appear ready to make concessions means that even if they ended up having to go through some sort of bankruptcy, it would be a very quick type of bankruptcy," he said.

Even in bankruptcy, Chrysler is likely to avoid liquidation, according to informed sources mentioned in the NYT article. Chrysler was granted a delay in proceedings by the US government and both the manufacturer and the Obama Administration remain committed to resolving outstanding issues ahead of the deadline of 11:59pm Thursday (early Friday, AEST).

But Chapter 11 bankruptcy proceedings -- and the court protection for Chrysler that would go with those proceedings -- could actually aid Chrysler, rather than just hang over the company like the sword of Damocles.

It would clear the decks of outstanding liabilities and put to rest any concerns on the part of Fiat in joining with Chrysler. Under Chapter 11, Chrysler could retire its outstanding debt and close dealerships where profitable trading is no longer possible. Members of the Presidentially-appointed 'auto task force' are said to be in favour of Chapter 11 for Chrysler, says the NYT.

The newspaper believes that any agreement with Fiat would be predicated on the departure of Chairman and CEO of Chrysler, Robert Nardelli. Nardelli would be following in the footsteps of GM CEO Rick Wagoner (more here) who was asked to resign from his position by President Obama.

While any announcement will have to await the expiry of the deadline, Chrysler Australia has already advised that it will hold a press conference tomorrow afternoon. The Carsales Network will be attending and we'll bring you the news from that conference at the earliest opportunity.

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