Chrysler faces tough but clearer future

"This is not a sign of weakness, but rather one more step on a clearly charted path to Chrysler's revival. I have every confidence that Chrysler will emerge from this process stronger and more competitive."

Thus did US President Barak Obama announce at a press conference overnight that Chrysler was officially and technically bankrupt, having filed a petition for bankruptcy under the legal process known in the US as 'Chapter 11'.

The President also delivered the news that Chrysler and Fiat had "formed a partnership" ahead of the word that everyone had been waiting to hear -- Chrysler was bankrupt.

In the US, Chapter 11 bankruptcy doesn't convey the same stigma that bankruptcy in Australia does (more here). Chapter 11 is a legal avenue for a company to continue trading and restructuring without threat of liquidation by creditors.

Automotive News, covering the breaking news in its Newscast service, described Chrysler's move as "surgical bankruptcy" and the corporation may free itself of court supervision within 30 to 60 days.

During that period, most Chrysler plants will be idled, but the US Government will fund the corporation's continuing operations during bankruptcy with a US $3.5 billion bail-out. Industry analysts believe the plants are being closed temporarily to allow a backlog of inventory to be cleared by dealers. On expiry of the bankruptcy period, the government will provide Chrysler with a further sum of US $4.5 billion. These are loans to be repaid by Chrysler in the fullness of time.

As mentioned in our previous report (more here), Chrysler's CEO Robert Nardelli will resign once the bankruptcy is concluded. President Tom LaSorda will also vacate his position with the company.

Nardelli will continue to work with Cerberus Capital Management as an adviser, Cerberus no longer holding an interest in Chrysler. Cerberus is releasing its hold on Chrysler as part of the Chapter 11 restructure. The new owners will be an amalgam of trade union retirement interests, North American governments and Italian car maker Fiat.

According to Automotive News, the company will split in two: viable and non-viable assets. Chrysler dealers will be closed down as part of the restructure, although it's not known at this stage how many will be affected. The retailers are required as part of the company restructure to place their finance business with GMAC, not Chrysler Finance. Presumably Chrysler Finance will be one of the non-viable assets.

Chrysler had achieved rapid and far-reaching changes in the 30 days up to yesterday's government-imposed deadline, having secured new deals with the American UAW (United Auto Workers) and the CAW (Canadian Auto Workers). The company had hooked Fiat as a partner for future product development and things were looking rosy, other than the sheer level of debt.

As reported already (more here), the US Treasury Department and Chrysler worked through the night right up to the deadline to convince smaller banks and hedge funds to accept a US $2.25 billion settlement, but the minor creditors refused to accept.

President Obama was critical of these smaller institutions, saying: "They were hoping that everybody else would have to make sacrifices -- and they would make none. Some demanded twice the return that other lenders were getting. I don't stand with them. I stand with Chrysler's employees and their families and communities."

Fiat will take 20 per cent share in Chrysler (at no effective cost to Fiat!). The door is left open for Fiat's interest in Chrysler to rise to 35 per cent, if the Italian manufacturer chooses, but Fiat won't be in a position to become a majority owner of Chrysler until Chrysler has repaid its federal government loans.

A retirees' healthcare fund run by the UAW will control 55 per cent of Chrysler from this point forward. That leaves a 10 per cent balance in the hands of the US and Canadian governments.

Chrysler's soon-to-be 'owner', Fiat, has also made statements regarding the alliance.

"Bringing together Fiat's world-class technology, platforms and power-trains for small and medium sized cars, and its extensive distribution network in Latin America and Europe with Chrysler's rich heritage, strong North American presence and talented and dedicated workforce will create a powerful new automotive company, while helping preserve jobs and a manufacturing industry that is critically important to the U.S. and Canadian economies," said Fiat Group CEO, Sergio Marchionne, welcoming the outcome.

Marchionne (pictured) is already looking beyond the bankruptcy period, stating that he intended to tour US and Canadian facilities in coming weeks and declaring: "we will be preparing ourselves to reemerge quickly as a reliable and competitive automaker".

Should we gather from this that the Italian will follow the lead of Renault/Nissan boss Carlos Ghosn and head up both alliance partners?

Marchionne also explicitly concluded that the partnership with Chrysler had substantive benefits for Fiat.

"We are certain that a stronger and more international Fiat will emerge from this alliance, with an even greater capacity to compete in markets worldwide," he said in a prepared statement.

The Chrysler announcement follows the news that GM will close down its performance division Pontiac before the end of next year. GM too, faces a deadline imposed by the government to restructure its assets and liabilities to avoid bankruptcy proceedings, but GM has until the end of June to convince the government -- and creditors -- that it has done enough to continue trading without resorting to Chapter 11.

Chrysler Australia will hold a press conference this afternoon and the Carsales Network will bring you the outcome of that conference later today.

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