By Jason Simpkins
Chrysler LLC will declare bankruptcy today (Thursday), according to various reports citing officials within the Obama Administration.
Representatives from the automaker, lenders, unions, and the Treasury Department worked diligently to get a deadline deal done. But even though Chrysler made headway with union representatives and reached a preliminary agreement for a partnership with Italy's Fiat SpA (OTC ADR: FIATY), a disagreement among creditors proved to be the company's downfall.
A committee representing bank and private equity lenders Monday 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 represented secured creditors that hold about 75% of Chrysler's outstanding debt, but the more than 40 hedge funds and large investors holding the remaining 25% refused.
The government had hoped for at least 90% participation from the lenders before providing as much as $6 billion in additional aid.
One executive working with the debt holders told BusinessWeek that smaller banks complained 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) were caving to political pressure.
The debt holders also complained that the United Auto Workers (UAW) got more favorable treatment from the White House, BusinessWeek said. The UAW reached an agreement Sunday that gave 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.
"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 said earlier this week.
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.
But without agreement from the assorted lenders, bankruptcy was unavoidable.
The Treasury Department increased its offer to $2.25 billion from $2 billion as the deadline approached, but the disgruntled lenders refused to budge.
"While the administration was willing to give the holdout creditors a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success," an administration official told the Financial Times.
"Their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders, nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward," the official added.
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