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Chrysler 'to file for bankruptcy' Chrysler bankruptcy deal revealed
(about 5 hours later)
Chrysler is to enter bankruptcy protection after failing to persuade its main lenders to write off its debts, a White House official has said. US carmaker Chrysler will file for Chapter 11 bankruptcy protection immediately and has formed an alliance with Fiat, President Obama has said.
President Barack Obama is now due to make a statement later on the future of the struggling US carmaker. Chapter 11 protects firms from their creditors, allowing them to rearrange their finances while still trading.
The news comes as Chrysler had been in last minute talks to restructure the business before a midnight deadline. Some Chrysler dealerships will close over time but no jobs will be lost in the short term, President Obama said.
President Obama has already said that Chrysler would emerge stronger after any move into bankruptcy protection. The move came after talks had broken down with Chrysler's lenders late on Wednesday, the White House said.
Chrysler will receive a further $8bn (£5.4bn) in government aid, up from the $6bn the Treasury had promised it if it had successfully restructured the business by midnight.
The White House described the move as a "surgical short bankruptcy" which should last between 30 and 60 days.
President Obama said the "necessary steps" had been taken to give Chrysler "a new lease of life".
He added that he had "every hope" that Chrysler will become "stronger and more competitive".
New Chrysler
The filing for bankruptcy protection will lead to the forming of a new corporate entity.
Details of the new Chrysler include:
BANKRUPTCY PROTECTION US bankruptcy protection is called Chapter 11It gives US businesses time to rearrange their finances while continuing to trade, protected from their creditors History of Chrysler Can Fiat save Chrysler?
• Fiat will take a 20% stake, with the possibility of it rising to 35%
• The Treasury will have an 8% stake, a union-run trust fund VEBA will take a 55% stake, and the governments of Canada and Ontario will gain a combined 2% stake
• Current owner Cerberus will forfeit its 80.1% stake
• Daimler will give up its remaining 19.9% stake in Chrysler
• Chrysler bondholders will receive $2bn in cash in exchange for forgiving their $6.9bn debt.
'Hedge fund block''Hedge fund block'
The US government had told Chrysler it would be given a further $6bn (£4bn) of vital state loans if it had successfully restructured the business by midnight. The deal will need to be ratified by the bankruptcy court.
This included trying to persuade the firm's main lenders to accept $2bn in cash, in exchange for writing off all of Chrysler's $6.9bn secured debt. While Chrysler's main banks, holding 70% of the debt, accepted this proposal, it was rejected by hedge funds that hold a sizeable proportion of its remaining debt. Hedge funds are private investment funds that typically attract rich private investors.
Reports have said that while Chrysler's banks accepted this proposal, it was rejected by hedge funds that also hold a sizeable proportion of its debt. Their stance in the negotiations was criticised by President Obama.
However, some analysts had speculated that Chrysler may prefer to go into bankruptcy protection as a means to give its lenders even less. "A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout," he said.
US Chapter 11 bankruptcy protection gives a US firm time to rearrange its finances under a court-supervised procedure, while continuing to trade, protected from its creditors. "They were hoping that everybody else would make sacrifices and they would have to make none. Some demanded twice the return that other lenders were getting. I don't stand with them."
Chrysler is owned by private equity firm Cerberus Capital Management, which bought an 80.1% stake from Germany's Daimler for 7.4bn euros ($9.9bn; £6.6bn) in 2007.Chrysler is owned by private equity firm Cerberus Capital Management, which bought an 80.1% stake from Germany's Daimler for 7.4bn euros ($9.9bn; £6.6bn) in 2007.
Fiat talks Cerberus will forfeit its stake as part of the deal.
The US government gave Chrysler three key restructuring demands. Italian partner
BANKRUPTCY PROTECTION US bankruptcy protection is called Chapter 11It gives US businesses time to rearrange their finances while continuing to trade, protected from their creditors class="" href="/1/hi/business/8026433.stm">History of Chrysler The partnership with Fiat will create the world's sixth largest carmaker.
In addition to lenders writing off the carmaker's debts, it was asked to secure a cost-cutting deal with its main union, and establish an alliance with Italian car firm Fiat. class="" href="/1/hi/business/8026903.stm">In pictures: Chrysler's journey
While Chrysler appears to have failed to reach agreement with its lenders, it has gained an agreement with the union, and talks with Fiat are said to be near a successful conclusion. Italy's Fiat will not have to pay anything for its share, which will give it access to the North American marketplace. It will also have the right to appoint three company directors.
Fiat is seeking an initial 20% stake in Chrysler, which would then rise to 35% and could even reach 51%. In return, Chrysler will be able to take advantage of Fiat's expertise in making smaller, more fuel-efficient cars in its existing US factories.
The Italian firm will not have to pay anything for the share, which will give it access to the North American marketplace. No Chrysler plants in the US will close.
In return, Chrysler will be able to take advantage of Fiat's expertise in making smaller, more fuel efficient cars. The Treasury will provide Chrysler with $3.3bn in working capital to support it through the Chapter 11 process.
Sector-wide woes It will also extend a $4.7bn loan to the new company, once it has emerged from bankruptcy, repayable over the next eight years.
Chrysler, the smallest of the US "Big Three" carmakers after General Motors (GM) and Ford, secured a $4bn loan from the US government at the start of the year, and has since gained $500m more. Chrysler's financial arm - that makes loans to buyers and to dealers - will be merged into GMAC Financial Services. GMAC is the finance arm of General Motors (GM) but was bailed out by the government in December. The new GMAC will get government support.
GM has also received multi-billion government loans. While Ford has yet to require any money, the government has agreed to give it financial support, should it be needed. Chrysler, the smallest of the US "Big Three" carmakers after GM and Ford, secured a $4bn loan from the US government at the start of the year, and has since gained $500m more.
All three firms have seen sales slump dramatically in their home market as the recession has intensified.
GM has its own deadline of 1 June to restructure the business to receive additional state aid, and avoid needing bankruptcy protection.
Daimler said earlier this week that it would now be giving up its remaining 19.9% stake in Chrysler.
Under the deal, Daimler said it will also write off Chrysler's outstanding loans, and make three annual payments of $200m into the Chrysler's pension plans.
Daimler said it marked the final separation of the two firms.
The German firm bought Chrysler in 1998 for $38bn.
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