By Jason Simpkins
Chrysler LLC yesterday (Thursday) filed for bankruptcy protection after a failed attempt to reorganize operations and restructure debt before the government appointed deadline.
The collapse of one of America’s largest and oldest auto companies – having been founded in 1925 – shows just how much the U.S. auto industry has deteriorated since its heyday in the mid-20th century.
As many analysts speculated would be the case over the past several months, Chrysler is filing for Chapter 11 bankruptcy protection and attempting to reorganize, making it the first major automaker to do so since Studebaker did in 1933.
Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation, but President Barack Obama and the U.S. Department of Treasury say they are willing to take the steps necessary to prevent that from happening.
"The necessary steps have been taken to give one of America's most storied automakers, Chrysler, a new lease on life," Obama said yesterday.
The Obama administration previously described a “quick and surgical bankruptcy” that could be completed in 30 to 60 days. The government plans to use Section 363 of the bankruptcy code to sell assets, liberate the company from liabilities and restructure its debt, creating a new Chrysler.
Chrysler will receive $10.5 billion in U.S. and Canadian government financing – $8.08 billion from the U.S. government and $2.42 billion from Canada and Ontario. The U.S. government will receive an 8% stake in the company, and Canada and Ontario will jointly receive a 2% stake
However, not everyone is convinced that the turnaround will be as simple as the Obama administration would like to believe.
"There are a lot of people that have laid claims to Chrysler, and it seems that there is just not enough to go around," David Silver, an auto industry analyst at WStreet.com, told MarketWatch. "I do not think that Chrysler will ever regain the aura it once had, and I doubt it will be a major player on the world stage in the years to come."
The Treasury Department’s failed attempt to get creditors to accept $2.25 billion and a stake in the company in exchange for absolving Chrysler of $6.9 billion of debt was just a precursor to the legal disputes that will emerge from this filing.
Chrysler listed assets and debt of more than $1 billion in documents filed today in U.S. Bankruptcy Court in New York, Bloomberg reported.
Filings by Chrysler units Peapod Mobility and Chrysler Realty Co. listed over $1 billion in both debts and assets as well.
Chrysler’s largest unsecured creditors are Ohio Module MFG Co., with a claim of $70 million, and BBDO Detroit Inc. with a claim of $58.1 million, according to the Bloomberg report.
Even if the most optimistic of projected outcomes comes to fruition, and Chrysler returns to profitability, it will no longer be an American company; it will be Italian, per an arrangement with Fiat SpA (OTC ADR: FIATY), Italy’s largest car manufacturer.
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.
Chrysler Chief Executive Officer Robert Nardelli will see the company through bankruptcy. Once the process is complete, Chrysler will be left in the hands of Fiat chief executive Sergio Marchionne
In 2004, Marchionne stepped up to the challenge of turning around Fiat, driving a swift and vigorous turnaround effort that returned it to profitability by 2006. But Chrysler will likely pose a greater set of hurdles.
“It’s a testament to Sergio Marchionne that he could take a company like Fiat and turn it into a company that’s vying to do deals with other large companies,” Karl Brauer, editor in chief of automotive Web site Edmunds.com, told MSNBC. “But fixing Fiat is one thing; doing a deal like Chrysler-Fiat is another. Putting all the pieces together is much more difficult. To go from building Dodge Durangos to Fiat 500s takes time, and time is something Chrysler doesn’t have.”
“No matter how capable a businessman you are, taking on another car company that’s been losing money for years and at the same time taking a bigger stake in an industry that’s in freefall and has an uncertain future is a huge gamble,” he added.
General Motors: The Next Giant to Fall?
Chrysler may be the first large American car company since Studebaker to declare bankruptcy, but General Motors Corp. (GM) isn’t far behind. GM has until June 1 to prove its viability.
The company last reported an annual profit in 2004, when its profit tumbled 23% to $2.70 billion. Over the past four years, from 2005 through 2008, the 101-year-old auto giant accumulated about $82 billion in losses.
It may be hard to believe now, but 40 years ago, GM produced one out of every two vehicles sold in the United States. Even as recently as 1984, the company had a 41.7% share of the U.S. car and truck market. But today it controls less than half that.
GM’s share of the U.S. auto market slipped to just 18.2% last month. The company’s share of the market is expected to be closer to 19% for the month of April, down from 20.7% just last year, according to Edmunds.com.
In the midst of its own restructuring effort, GM’s restructuring plan calls for an 18.4% market share by 2012, down from the 20% the company projected in February.
Even if GM avoids bankruptcy, the company, which is surviving on $15.4 billion in government loans, has already lost its former luster.
GM said last week that it would:
- Close 16 of its 47 manufacturing by 2012.
- Reduce its hourly workforce from about 61,000 to 38,000 by 2011.
- Force salaried workers to take up to three months off each year at 75% pay.
- Reduce its number of dealers by 42% to 3,600 by the end of 2010.
- And eliminate its iconic Pontiac brand.
These measures will help GM cut its structural costs by $55.8 billion by 2010, but like Chrysler, the biggest challenge will be restructuring its huge pile of debt.
GM has asked the government to take 51% of its common stock in exchange for a 50% reduction in the money owed to taxpayers the government loans to the company. That swap would cancel about $10 billion in government debt.
GM is also offering 39% of its equity and about $10 billion in cash to the United Auto Workers (UAW) union to restructure union healthcare obligations.
Meanwhile, the company is offering bondholders 10% of its stock if nearly all the $27 billion in unsecured debt is retired by May. However, bondholders, disappointed with the offer, have already submitted a counter offer.
A committee representing institutional bondholders is seeking to put bondholders on the same level as the UAW, which is owed $7 billion less. Under its terms, GM would issue new stock and give 41% to the UAW, 51% to bondholders, and 1% to common equity holders.
In having to placate a number of different parties, GM is attempting to pull off the same balancing act that sent Chrysler into bankruptcy. As was the case with Chrysler, the government is looking for 90% bondholder participation. And analysts are skeptical.
Kip Penniman Jr., an analyst with KDP Investment Advisors Inc., predicted the exchange offer would fail and GM will file for bankruptcy, saying “."
With two major American car companies on the ropes the door is wide open for foreign car companies to slide in and siphon off more market share.
The total market share for domestic automakers will be around 46.2% this month, according to Edmunds – down from 48.4% in April 2008. GM alone controlled about that much of the U.S. market in the 1970s.
News and Related Story Links:
- NY Times:
A Primer on a Chrysler Bankruptcy
Obama says Chrysler to be stronger after bankruptcy
- Money Morning:
Chrysler Bankruptcy Confirmed
Can Marchionne’s magic work at Chrysler?
- Money Morning:
The Slow Death of General Motors
- The Associated Press:
- General Motors:
GM Accelerates its Reinvention as a Leaner, More Viable Company
- General Motors:
GM Launches Exchange Offers and Consent Solicitations for Outstanding Notes