Chrysler Bankruptcy Likely As Creditors Continue To Balk

Tomorrow (Thursday) marks the government-imposed deadline for Chrysler LLC to reach a deal with its creditors to sufficiently reduce debt and strike a deal with Fiat SpA (FIATY.PK), or else face bankruptcy. And while a Chrysler bankruptcy is still avoidable, it is beginning to look more and more likely as creditors continue to stonewall.

Representatives from the automaker, lenders, unions, and the Treasury Department are working diligently to get a deadline deal done. But even though Chrysler has made headway with union representatives and drawn up preliminary plans for a merger with Fiat, a disagreement among the company’s creditors continues to be the major sticking point.

A committee representing bank and private equity lenders yesterday agreed to take just $2 billion of the $6.9 billion owed by Chrysler, as well as a 5% stake in the restructured company. The committee represents secured creditors that hold about 75% of Chrysler’s outstanding debt, but the more than 40 hedge funds and large investors that hold the remaining 25% of the debt are holding out for better terms.

One executive working with the debt holders told BusinessWeek that smaller banks are complaining that the bigger lenders, such as JP Morgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS), who received money from the government’s Troubled Asset Relief Program (TARP) caved to political pressure and struck a weak deal.

The smaller hedge funds are “pressing for every nickel,” another person familiar with the talks told the Detroit Free Press. So a “quick, surgical bankruptcy” like the government has described remains possible.”

The government wants at least 90% participation from the lenders before it provides as much as $6 billion in additional aid.

“The debt holders should understand that this deal is better than what they could expect in bankruptcy, and I encourage them to accept,” said U.S. Rep. Gary Peters (D-Mich.).

The debt holders have also been complaining that the United Auto Workers (UAW) got more favorable treatment from the White House, BusinessWeek said. The UAW reached an agreement Sunday that gives the union’s health care trust, the Voluntary Employee Benefit Association (VEBA), $4.5 billion in Chrysler stock.  A VEBA representative will also hold a seat on the company’s board.

However, the union also made concessions that include wage cuts, a reduction in overtime pay opportunities, fewer vacation days, shorter shift breaks, and the termination of the so-called Jobs Bank, which continued to pay workers even after they lost their jobs.

Chrysler’s 26,000 workers represented by the UAW began voting on the agreement Tuesday, with the balloting expected to be completed by Wednesday night.

“They’re going to accept it reluctantly because they have no other option,” Gary N. Chaison, a professor of industrial relations at Clark University told The New York Times. “The only way the UAW can sell this is by saying that if they didn’t accept this, it would be straight to bankruptcy.”

The government has not yet made its final decision on whether to force Chrysler into bankruptcy, but the Treasury Department is already preparing a Chapter 11 filing for the company as a matter of “due diligence,” Sen. Debbie Stabenow, (D-Mich.) told Bloomberg.  “They are preparing all options.”

Fiat Chief Executive Officer Sergio Marchionne said last week reaffirmed his company’s commitment to getting a deal done with Chrysler.

“I see no reason why this should not happen and confirm our unwavering commitment to getting this done,” Marchionne said.

Fiat is set to take an initial stake of 20% in Chrysler that could increase to as much as 35% by achieving operating goals. The Italian automaker then would have an option to buy another 16% of Auburn Hills, Mich.-based Chrysler over seven years, assuming government loans are repaid.

Talks between Chrysler and Fiat are continuing and are likely to produce a signed agreement by the deadline, people familiar with those discussions told The New York Times. But without agreement from the assorted lenders, bankruptcy will be the likely outcome.

Ken Lewenza, president of the Canadian Auto Workers union, said on Tuesday that Marchionne confided in him that Chrysler is likely to seek bankruptcy protection, Reuters reported.

Marchionne “was careful, he said: ‘You know Ken, a lot of things can happen in two days, but if I was a betting man, I would suggest Chrysler is going to fall into Chapter 11′,” Lewenza said.

Subscribe by RSS Subscribe by Email