Chrysler Files for Bankruptcy; Reaches Agreement with Fiat for New Company; Fiat Percentage Ownership Tied to Fuel-Efficiency Targets
Chrysler LLC has been unable to obtain the necessary concessions from all of its lenders which would have avoided the need for a bankruptcy proceeding. As a result, under the direction of the US Treasury, Chrysler LLC and 24 of its wholly-owned US subsidiaries today filed voluntary petitions under Chapter 11 of the US Bankruptcy Code in US Bankruptcy Court for the Southern District of New York.
Chrysler has also reached an agreement in principle to establish a global strategic alliance with Fiat SpA to form a new company. It would allow Chrysler and Fiat to fully optimize their respective manufacturing footprints and the global supplier base, while providing each with access to additional markets. Fiat powertrains and components would also be produced at Chrysler manufacturing sites.
Chrysler will file a motion under Section 363 of the Bankruptcy Code requesting the swift approval by the Court of the agreement with Fiat and the sale of Chrysler’s principal assets to the new company. The benefit of this type of filing is speed. Chrysler hopes this will allow a leaner new company to emerge in a matter of 30 to 60 days.
Fiat cannot become a majority owner until after all US government loans have been completely repaid. When the transaction is completed, the Voluntary Employee Beneficiary Association (VEBA) will own 55% of the new company and the US and Canadian governments will own proportionate shares of a 10% stake. Fiat will initially hold a 20% ownership stake in Chrysler. Fiat will have the right to increase its ownership stake an additional 15% in three increments as it meets the following criteria:
- 5% for bringing a 40 mpg vehicle platform to Chrysler to be produced in the US;
- 5% for providing a fuel-efficient engine family to be produced in the US for use in Chrysler vehicles;
- 5% for providing Chrysler access to its vast global distribution network to facilitate the export of Chrysler vehicles.
As a part of the restructuring, most manufacturing operations will be temporarily idled effective 4 May 2009. Normal production schedules will resume when the transaction is completed, which is anticipated within 30 to 60 days.
Bob Nardelli, Chairman and CEO of Chrysler since August 2007, also announced to Chrysler LLC’s Board of Management and the US Treasury his plan to leave the company following the emergence of the new company from Chapter 11 and the completion of the alliance with Fiat. He will return to Cerberus Capital Management LP as an advisor.
We want to personally assure everyone that the new company will produce and support quality vehicles under the Jeep, Dodge and Chrysler brands as well as parts under the Mopar brand. Chrysler employees will become employees of the new company. Chrysler dealerships remain open for business serving our customers. All vehicle warranties will be honored without interruption and consumers can continue to purchase our vehicles with complete confidence.—Bob Nardelli
During the restructuring process, the government will provide sufficient debtor-in-possession (DIP) financing to allow continuation of “business as usual.”
...we are using this structured bankruptcy to rapidly implement tough but necessary changes, including: the agreed upon wage and benefit structure for active and retired employees that is competitive with those of transplant manufacturers; a reduction of debt and interest expense; the disposition of idle assets; a rationalized and more efficient dealer network; and sound agreements with our suppliers.—Bob Nardelli
Chrysler’s Mexican, Canadian and other international operations are not part of any bankruptcy filing.
As part of the restructuring and with the backing of the US Treasury, Chrysler reached an agreement in principle with GMAC to become the preferred lender for Chrysler dealer and consumer business. GMAC will be able to offer the best long-term finance options for Chrysler dealers and customers with standard rate installment products.