Chrysler aims for rapid restructuring with 'surgical' bankruptcy
Chrysler LLC will survive, but it will be owned by its largest union and the U.S. and Canadian governments, and its future hinges once again on a successful marriage with a European spouse.
The six-month race to keep the No. 3 Detroit auto maker on the road hit the finish line yesterday when it filed for bankruptcy protection in the United States, but also hooked up with Fiat SpA for its second transatlantic marriage in about a decade.
The U.S. and Canadian governments will provide $15-billion (U.S.) worth of loans to carry Chrysler through what is supposed to be a "surgical" bankruptcy process, rather than the typical drawn-out affair that would paralyze the company for months while it slowly bled to death. Court documents show the company lost a staggering $16.8-billion last year as North American car sales collapsed.
"The necessary steps have been taken to give one of America's most storied auto makers, Chrysler, a new lease on life," U.S. President Barack Obama told reporters at the White House.
The federal and Ontario governments will contribute about $3-billion of the rescue money and receive 2 per cent of a total 10-per-cent equity stake the three governments will hold in the new company that emerges from bankruptcy protection.
That company will contain Chrysler's two Canadian assembly plants and one parts factory. Canada will also hold one of the six government seats on the company's new, nine-member board of directors.
"Let not anyone suggest that the money we are giving today is a gift," Prime Minister Stephen Harper said at a news conference in Toronto. "We have insisted that the very difficult decisions that are necessary to ensure the viability of this company have been made."
The seat on the board is designed to protect the taxpayers' interests, Mr. Harper said, and neither Ottawa nor Ontario wants to own an auto maker or manage it.
But a hint of how even such a government-backed, prepackaged bankruptcy containing agreements from key stakeholders could spiral out of control came yesterday when some suppliers halted parts shipments, causing the shutdown of a Chrysler assembly plant near Detroit.
Most of the auto maker's 10 North American assembly plants will shut down for 30 to 60 days while it's in bankruptcy protection, dealing another blow to already battered parts makers and another jolt to a reeling North American economy.
Court documents reveal that Chrysler vice-chairman Tom LaSorda has spent the better part of two years negotiating with virtually every auto maker in the world looking for an international partner to help the company Walter Chrysler founded in 1925 expand beyond North America.
That included, Mr. LaSorda said in a filing, negotiations with Canadian auto parts giant Magna International Inc., which sought to buy several Chrysler assets, sales companies in Russia and proposed an alliance to distribute Chrysler vehicles in Russia and Eastern Europe.
All attempts to find a partner other than Fiat failed, he said so the only alternative to the Fiat deal is liquidation.
"Should Chrysler liquidate, the reverberations throughout the American economy (and NAFTA economies generally) will be severe in both breadth and depth," he said.
While there was relief that the stark prospect of liquidation had been avoided, the Canadian-born Mr. LaSorda told reporters there will be more job cuts and plant closings.
He surprised reporters by announcing that he will retire before the bankruptcy process is completed. Robert Nardelli, Chrysler's chairman, will resign and return to Cerberus Capital Management LP.
The private equity fund owned Chrysler for about two years after the 1998 merger of Daimler-Benz AG and Chrysler Corp. blew apart in 2007 but is now out of the picture.
Canadian plants are likely to be shut for the duration of the bankruptcy proceedings, Canadian Auto Workers president Ken Lewenza said.
The commitment to maintain 20 per cent of the company's production in Canada was crucial, Mr. Lewenza said, for the CAW, which agreed last week to major cuts in hourly labour costs to make sure Fiat didn't walk away from the deal.
It is "shocking that a company with Chrysler's stature and history should be forced into bankruptcy protection," he said.
Chrysler Canada Inc., however, has opted to pursue an unusual restructuring strategy that will allow it to continue operating its three Ontario plants largely outside a formal court process under the Companies Creditors Arrangement Act (CCAA).
But the company is expected to eventually seek court restructuring in Canada through what is known as a "skinny" restructuring under Section 18.6 of the CCAA.
That plan would allow Chrysler to avoid seeking court approval until its U.S. parent has completed its restructuring.
The move marks one of the few times that a Canadian subsidiary has chosen not to seek protection from its creditors at the same time that its parent company has initiated bankruptcy proceedings. People familiar with the strategy said Chrysler believes it can make the plan work because the subsidiary has no debt and is up to date on all its payments to its various suppliers.
The largest supplier to Chrysler LLC is Magna.
Court documents that listed the top 50 creditors included several Magna divisions with a total of about $57-million owing.
The United Auto Workers union will own about 55 per cent of the new shares of Chrysler through a trust fund created to pay for the company's health care in the United States.
Fiat will own 20 per cent and will be permitted to pick up another 15 per cent once it meets conditions on bringing fuel-efficient vehicles and engines to the United States.
The theory behind the Fiat-Chrysler partnership is to marry an auto maker that is North American only and strong in the truck market, to a European company more global in scale that is a leader in small-car development and sales.
The deal doesn't cost Fiat any cash, but the Chrysler deal is a centrepiece of chief executive officer Sergio Marchionne's plan to create a global powerhouse capable of producing about five million vehicles annually.
Mr. Marchionne is also eyeing one of the pieces of General Motors Corp. in Europe, Adam Opel AG, which needs a cash infusion.
With reports from
Richard Blackwell in Toronto,
Barrie McKenna in Washington
and Eric Reguly in Rome
