Thursday, April 30, 2009

Chrysler Files for Bankruptcy to Shed Debt, Seal Fiat Accord

Chrysler LLC, the smallest of the Big Three U.S. automakers, filed today for bankruptcy protection in New York to streamline operations and shed debt in a reorganization that includes Italy’s Fiat SpA as a partner.

The iconic automaker, which survived a near-death experience in 1979, missed a U.S. government deadline to come up with a restructuring plan by today that was rigorous enough to avoid bankruptcy and qualify for more bailout aid. The carmaker tried to negotiate an alliance with Fiat, reduce $6.9 billion in secured loans and cut $10.6 billion owed to a pension fund. Some lenders refused to slash the debt to $2.25 billion.

The carmaker and the government plan to use the bankruptcy process to revitalize Chrysler by putting its best assets, such as its Jeep and Dodge Ram brands, in a new company that wouldn’t be burdened by current costs and debt. A slimmed-down version of Chrysler, armed with Fiat’s small-car technology, would emerge from such a process, giving the carmaker a “new lease on life,” U.S. President Barack Obama said today.

“Bankruptcy could do a lot of good for Chrysler” by allowing it to “shrink down to the size it needs” quickly, said Stephen Lubben, who teaches bankruptcy-law at Seton Hall University School of Law in Newark, New Jersey. “Fiat has shown that it knows how to turn around a troubled business.”

Bankruptcy can involve uncertainty and delay. Dissident creditors intend to object to the company’s reorganization plan, a person familiar with their thinking said. That might thwart President Barack Obama’s goal of a “surgical” bankruptcy that would put a viable carmaker quickly into the market.

Important to Nation

Having the government as a party to such a process, on the other hand, may work in Chrysler’s favor, lawyers said.

“If the Secretary of the Treasury suggests to the court that a particular result is important to him and to the nation, it may be hard for a judge to resist,” said Richard Hahn, co- chair of law firm Debevoise & Plimpton LLP’s bankruptcy group.

The government also has the power to change some of the traditional business rules by changing existing law, he said.

The filing made today may prove a template for rival General Motors Corp. GM was given a June 1 deadline by the government to cut costs and debt to qualify for its share of added bailout aid. To become a viable carmaker, GM plans to keep only its most profitable brands, such as Chevrolet and Cadillac.

Chrysler, controlled by private-equity firm Cerberus Capital Management LP, received the $4 billion in January and was promised $6 billion more if costs and debt were cut enough. After the initial loan, U.S. auto sales plunged to a 27-year low in February and dropped 37 percent in March.