President Obama announced a plan that would allow the United Automobile Workers, through their retirement plan, to take control of Chrysler, with Fiat and the United States as junior partners. The government would lend about $8 billion more to the company, on top of the $4 billion it had already provided. The administration laid out the terms of a deal it claims will save more than 35,000 jobs.
With yesterday’s filing, Chrysler became the first major American automaker to seek bankruptcy protection since Studebaker did so in 1933. In terms of the impact on consumers, the administration moved quickly to stress that Chrysler’s warranties would now be backed by the United States government. “If you are considering buying a car, I hope it will be an American car,” President Obama said. “I want to remind you that if you decide to buy a Chrysler, your warranty will be safe.”
The deal, however, required critical concessions from the U.A.W. The union, for example, agreed to accept company stock for 50% of what Chrysler owes its retiree health care fund. Most of the major debtholders, led by JPMorgan Chase, agreed to write down the debt owed to them by more than two-thirds. Analysts say this puts the onus on the remaining holdouts—including units of OppenheimerFunds, Xerion Capital Fund of Perella Weinberg Partners, and Stairway Capital Management—which argued they were falling victim to the willingness of their big banking partners in Chrysler to play nice with a government that had helped bail them out as well. Perella Weinberg decided late Thursday that it would accept the government’s terms. Administration officials said the holdouts’ position left them no option but to force Chrysler into bankruptcy.
Observers say the hope now is that Chrysler will come out of bankruptcy quickly, perhaps as soon as late June (or as late as August, according to some estimates), and serve as a model for General Motors, which has to produce its own lifesaving plan in the next 30 days.
In the interim, Chrysler said its factories would go mostly idle starting Monday, and remain so for the bulk of the process. Auto workers will receive about 80% of their base pay during the shutdown. The Treasury is providing $3.3 billion in so-called debtor-in-possession financing, and administration officials said during a conference call with reporters that no jobs would be lost during the bankruptcy.
U.S. auto-parts suppliers such as BorgWarner, Inc., are counting on Chrysler LLC’s bankruptcy process to get paid for sales to the automaker, while producers including Tenneco, Inc. seek government guarantees. Analysts believe the automaker probably will ask the bankruptcy judge to ensure payments to the most important parts makers.
“The critical vendors will likely be protected,” said Stephen Spivey, an auto analyst at Frost & Sullivan in San Antonio. “As long as Chrysler is not being liquidated, as long as it is just being restructured, they should make it.”
The automaker’s filing adds to challenges for the more than 4,000 U.S. parts companies. They already have had to cope with reduced production of cars and trucks, as U.S. auto sales tumbled to a 16-year low in 2008 and plunged 38% in the year’s first quarter. (April’s auto sales will be published next week.)
In recent months, the possibility of a Chrysler or General Motors Corp. bankruptcy also made it difficult for parts makers to borrow against payments owed by the automakers. Now, some of the largest suppliers must rely on the bankruptcy court to collect from Chrysler. “We fully expect to be classified as a critical supplier,” Timothy Manganello, BorgWarner’s chief executive officer, said on a conference call today. His Auburn Hills, Michigan-based company is the world’s biggest maker of automatic-transmission parts.
Tenneco, the largest maker of vehicle-exhaust systems, is seeking U.S. guarantees on about $72 million due to the Lake Forest, Illinois-based company from GM and $16 million from Chrysler. A $5 billion Treasury Department program including $1.5 billion allocated for Chrysler, offers assurance for such payments, which sometimes aren’t received for 45 to 60 days.
It is the position of some materials suppliers that Chrysler and U.S. government negotiators should make sure smaller companies (Tier 2 and Tier 3 suppliers) that produce components for larger parts makers are protected. “Little attention has been focused on the thousands of middle-market, lower-tier suppliers comprising the bulk of the automotive supply chain,” said Bill Gaskin, president of the Precision Metalforming Association, based in Independence, Ohio.
Sources: The New York Times, Bloomberg News, PMA