Chrysler LLC in Chapter 11 Bankruptcy Protection – Business Case Analysis

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Tag: Chrysler, Fiat, Chapter 11, Bankruptcy, GM, US Treasury

May 6, 2009

On Thursday April 30th, 2009 Chrysler LLC filed for Chapter 11 bankruptcy protection in New York (Court filing).  It is anticipated that a new company will emerge in an estimated 30-to-60 days.  The US Treasury along with the Canadian government will provide loans to the company in the amount of $10.5 billion.

The Treasury will provide a total of $8.1 billion in both in debtor-in-possession financing while in banruptcy and that includes $4.7 billion to allow the company to operate once it emerges.  The Canadian government will provide $2.4 billion.

It was also announced that current Chrysler Chairman and CEO Robert Nardelli will step down after the company emerges from bankruptcy protection.  In addition Chrysler Vice Chairman Tom LaSorda announced he will retire effective immediately.

The US Treasury released details of the agreement with Chrysler and its stakeholders.

The Chrysler Fiat Alliance – Shared Sacrifice

The alliance will retain Chrysler's existing factory footprint and continue producing Chrysler cars in U.S. factories. The alliance will create the sixth-largest global automaker, spreading R&D and design development costs over higher volumes, making it more competitive in an increasingly global and consolidating industry.

Fiat is contributing billions of dollars in advanced technology and intellectual property, and offering Chrysler access to a global distribution network.  Fiat's technology will allow Chrysler to build new fuel efficient cars and engines in U.S. factories.

The UAW has made important concessions on wages, benefits, and retiree health care that, while difficult, will help save jobs for active employees, pensions and health care for retirees and make Chrysler more competitive.  

Chrysler's largest secured creditors have agreed to exchange their portion of the Company's $6.9 billion secured claim for their pro-rata share of $2 billion in cash at closing.  The Bankruptcy Court process will be used to confirm this treatment on those lenders that failed to accept the offer that was accepted by a majority of the lenders. 

Daimler, Chrysler's current minority shareholder, has agreed to waive its share of Chrysler's $2 billion of second lien debt, give up its 19% equity interest in Chrysler's ultimate parent, and settle its guaranty obligation to the PBGC by agreeing to pay $600 million to Chrysler's pension funds.

Cerberus has agreed to waive its share of Chrysler's $2 billion of second lien debt and forfeit its entire equity stake in Chrysler. Cerberus has also agreed to transfer its ownership of the Chrysler headquarters in Auburn Hills, Michigan to the new Chrysler alliance. Lastly, Cerberus will contribute a claim it had against Daimler to assist in the Daimler settlement with the PBGC. 

Details on U.S. Government Support:

Consistent with the President's commitment to provide adequate working capital to help Chrysler through this restructuring period and loan up to $6 billion to the Chrysler-Fiat Alliance, the U.S. government has committed to provide assistance sufficient to help give Chrysler a chance to achieve financial viability. 

Working capital: The U.S. government is prepared to provide approximately $3.3 billion in debtor in possession financing to support Chrysler through an expedited chapter 11 proceeding. 

 Loan to the New Chrysler: Upon closing, the U.S. government is prepared to loan approximately $4.7 billion to New Chrysler, in the form of a term loan with $2.1 billion due in 30 months and the balance 50% due on the 7th anniversary and 50% due on the 8th anniversary of the loan. The interest will be an appropriate combination of cash and payment-in-kind. There is also an additional note of $288 million which is a fee for making these loans.  The loans will be secured by a first priority lien on all of Chrysler's assets.

Canadian Government Participation:

The governments of Canada and Ontario will participate alongside the U.S. Treasury in lending money to Chrysler and New Chrysler based on a 3:1 formula using Canadian currency.  The amount lent by the Canadians is incremental to the funding referenced above.

In addition, Chrysler Finance will enter into a deal with GMAC (owned in part by GM and Cerberus) who will provide financing to dealers and customers.

Under the proposed agreement with all stakeholders, Fiat will own up to 35% of the new company.  The UAW healthcare trust will own approximately 55% of the new company with the US and Canadian government controlling the remaining 10%.  Daimler and Cerberus will forgive $2 billion in debt, the US government its original $4 billion bridge loan and the UAW's $6 billion in cash that was to go to the healthcare trust fund.  It should be noted that the UAW will not own Chrysler but the shares will be place in trust.

Chrysler's former parent Daimler has also agreed to concessions and will divest its remaining 20% interest in the company.  In 2008, Daimler had written down the value of its position in Chrysler to zero including loans it made to the company when it was sold to Cerberus.  Daimler has also agreed to pay three annual installments of $200m (£137m) into Chrysler's pension plans. Daimler expects the agreement to reduce its 2nd Quarter earnings by about $700 million. 

The major road block had been the holders of $6.9 billion of Chrysler’s secured debt.  Major banks that hold 71% or $4.9 billion agreed to partial payment.  Chrysler’s largest debt holders include: JP Morgan Chase, Citibank, Goldman Sachs and Morgan Stanley.  However smaller investor were not agreeable to the term accepted by the banks that have been sitting on the debt since 2007.  Some of the original money the banks raised was sold off to investors that include: Yale University, Oaktree Capital Management and assets managed for the University of Kentucky, Halliburton, Kraft Foods Master Retirement and the Bill and Melinda Gates Foundation.

The group of 20 lenders rejected an offer by the government that would have paid them part of the $2.25 billion on $6.9 billion of debt. The big banks that have agreed to the plan have also received TARP money from the US Treasury as the financial crisis has unfolded.

As a result of the impasse with the smaller investors the US government pushed Chrysler into Chapter 11 bankruptcy.

At the press conference announcing the Chrysler bankruptcy, President Obama said:

"And countless Americans across our country will be making major sacrifices, as well, as a result of plans to consolidate dealers, brands, and product lines.

Now, while many stakeholders made sacrifices and worked constructively, I have to tell you, some did not. In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout.

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. I stand with Chrysler's employees and their families and communities. I stand with Chrysler's management, its dealers, and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.

I don't stand with those who held out when everybody else is making sacrifices. That's why I'm supporting Chrysler's plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and on to a path of success."

Upon entering formal Chapter 11 bankruptcy protection, Chrysler has stopped all vehicle production.

The Bankruptcy

According to documents filed with the court, Tom LaSorda for over two years actively sought partners to help the company survive.  Talks have included alliances with Nissan, GM, VW, Tata Motors, Magna, GAZ, Hyundai, Honda and Toyota.  The company even hosted Chinese manufactures in an attempt to sell off assets such as the PT Cruiser, Sebring, 300, Grand Cherokee, Commander, Durango and Aspen; and even it s Newark Paint Shop Facility.   Furthermore, LaSorda alleges that after two and a half year pursuing business transactions to secure Chrysler’s future “no party except Fiat has emerged as a viable and willing alliance partner” for the company.  He goes on to say that Fiat is Chrysler’s “last hope.”  

In addition the company outlined what it believes is the company’s “Too Big To Fail” arguments in support of its rationale for a quick approval of the pre-arrange bankruptcy agreement:

A liquidation would also have impacts on the nation's economy and Chrysler's stakeholders that are grim:

• 38,500 hourly and salaried Chrysler workers in the U.S. will lose their jobs;

• Chrysler's workers and retirees and their surviving spouses will lose over $9.8 billion of health care and other benefits and $2 billion in annual pension payments;

• All 23 of Chrysler's manufacturing plants and facilities and 15 parts depots in the United States will shut down (as well as 18 additional plants and parts depots worldwide);

• Approximately 3,200 Chrysler dealers will be put out of business and the over 140,000 employees of those dealerships will lose their jobs;

• Over $5.7 billion in outstanding auto parts and service supplier invoices will not be paid to Chrysler's suppliers and new business will be cancelled, forcing hundreds of suppliers out of business and the loss of hundreds of thousands of additional jobs;

• Over 31 million Chrysler, Jeep and Dodge owners would lose significant value in their cars and trucks, particularly due to questions about the ongoing availability of warranties and replacement parts and services;

• Local, state and federal governments will lose tens of billions of dollars in tax revenues, according to a research memorandum published by the Center for Automotive Research in November 2008;

• Over $100 billion in annual sales will disappear from local economies; and

• Chrysler's first lien secured creditors will receive net present value recoveries of less than 38 cents on the dollar and possibly as little as 9 cents; the U.S. government, another secured creditor, will receive less than that; and Chrysler's unsecured creditors will receive nothing.

According to documents filed with the courts, for the twelve months ending December 31, 2008, Chrysler recorded revenue of more than $48.4 billion and had assets of approximately $39.3 billion and liabilities totaling $55.2 billion.  Futhermore through the first half of 2008, Chrysler was meeting and exceeding all of its performance targets, generating over $1 billion in EBITDA and ending the first two quarters of 2008 with over $9.4 billion in unrestricted cash.  However, as the economy deteriorated in the second half of the year, the company ended up with a $16.8 billion loss in 2008.

According to past DaimlerChrylser AG annual reports the Chrysler group generated €46,989 in 2006, €50,086 in 2005 and €49,485 in 2004.  By comparison in 2008, the Fiat Auto Group had net sales of €26.9 billion ($35.4 billion).

The company also asked the courts to consider a "quick rinse" bankruptcy and to acknowledge the work that has been conducted by the company with stakeholders prior to the filing.  Court documents stated:

The proposed sale transaction that Chrysler is asking the Court to approve under section 363 of the Bankruptcy Code is the result of thousands of hours of negotiations among multiple parties. The transaction is being financially backed by the US Treasury, which will provide the new alliance with $6 billion of taxpayer money to start up and maintain operations. This would be an addition to the proposed $4.5 billion DIP loan. In addition to this unprecedented government support, virtually all of the major constituencies that would be affected by a Chrysler liquidation have recognized how devastating it would be and have made important concessions in support of the alliance.

A leading financial advisor Capstone developed a number of reports and analysis, including the April 26, 2009 Chrysler-Fiat Aliiance Section 363 Analysis.  Included in the analysis were income and cash flow projections in addition to an estimated balance sheet.  Court documents stated:

The principle impact of the Fiat alliance on cash flow to a restructured Chrysler include an increase of revenues by the addition of new and attractive products and technologies, and the addition of new and broader distribution opportunities and a decrease in capital investment and expense otherwise required for product and technology developments. (See Figures 1 through 3 below)

Figure 1: Income Estimates (Click to enlarge)

Figure 2: Cash Flow Estimates (Click to enlarge) 

Figure 3: Balance Sheet Estimates (Click to enlarge) 

Fiat would provide cars in segments not currently served or those underserved by Chrysler, particularly as market demand   increases for more fuel efficient small vehicles.  These carlines include the Fiat 500, and Jeep Panda in the small “A” segment and the Grand Punto and Alfa Mito in the subcompact B segment.  Fiat will also provide critical distribution access to foreign markets where Chrysler products currently have little or no presence such as Western Europe and South America.

Chrysler's North American could build 400,000 to 600,000 Fiat-based small vehicles and utilize three Chrysler facilities by 2013 or 2014 according to a Detroit Free Press Report.

The company plans to transfer good assets to the new company.  According to court filings, the company will close additional facilities to those previously announced.  Figures 4 and 5 present the facilities that will stay with old Chrysler and be liquidated and those that will go to the new company.  Chrysler will close a fullsize truck, minivan and midsize car plant.

Figure 4: Bad Assets (Click to enlarge)

Figure 5: Good Assets (Click to enlarge)

The secured lenders that have resisted the Treasury's proposal have filed an objection with the court (Docket Submission) outlining their case for better terms as a secured lender:

Here, the proposed sale of the Debtors’ assets will leave the Senior lenders with a diluted pool of assets and no further interests in the operating assets covered by their specific liens. The Constitution forbids this application of a law retroactively to undercut the Senior Lenders’ pre-existing property rights in favor or inferior creditors.


Chrysler is not indispensable or critical to the North American automotive supply chain or critical to the health of automobile production.    Since the first of the year Chrysler sales are down 50% and production down 57%.  These numbers do not reflect the deep cuts made during the last quarter of 2008.  As a whole the industry is down 37% from January through April. The supply chain is shaky but given the industry is still function if on a very limited level.  Moreover, the government has put measures into place to provide bridge loans to keep suppliers in business.  To maintain the sales level they have, Chrysler has been offering huge discounts on vehicles and leads the industry in customer incentive.  Based upon industry incentive data compiled by Autodata, in the past year, Chrysler has averaged over $4,000 in customer incentives and sales have dropped well below the industry average.  With the company in bankruptcy I expect sales will drop further and the longer it goes on the less relevant the company is to buyers if or when it emerges from court protection.  With production currently cut and the negatives associated with bankruptcy, sales in the US are likely to drop by 70% near term.  For the above reasons, Chrysler’s basic viability is in questions and if the Chapter 11 reorganization is successful will remain a going concern.

Chrysler and government officials anticipate the duration of the bankruptcy will last 30-to 60 days.  Nothing is far from certain in Chapter 11 reorganization and the aggressive timetable may not pan out as planned.  The lenders may continue to balk in court present real legal challenges to the section 363 expedited process.

There is also much uncertainty as to how the court will rule on the hold out secured debt holders.  Generally senior secured lenders are first in line to get repaid in a bankruptcy with junior unsecured lenders/creditors taking the biggest haircut.  However, the latest government proposal defies convention with the secured lenders making the largest sacrifice and the UAW healthcare trust getting a majority interest in the company with the largest potential upside.  

There are the appearances of a conflict of interest in the big banks that control 70% of Chrysler’s secured debt are recipients of TARP funds.  However, the hold out investors are generally private firms investing public money and not banks.  These private firms manage state and corporate pension funds, endowments, foundations, and individual investors.

This is also inconsistent with the original bailout agreement with the Bush administration to secure the $4 billion bridge loan.  That agreement stipulated that at least two-thirds of the company’s unsecured debt be converted to equity (December 2008 Loan Agreement).

There also appears to be valid legal arguments is support of the rights of secured debt holders that the government and Chrysler are trying to circumvent that could derail the Section 363 fast track bankruptcy process Chrysler has sought.  I defer the reader to the following legal articles by Bankruptcy Litigation on the Chrysler Chapter 11 proceedings – Part I, Part II and Part II

One thing to consider is that given the state of the economy, and limited buyers, it is likely that Chrysler assets would sell for pennies on the dollar and lenders will eventually accept the Treasury's terms.

The level of restructuring presented in the court documents is questionable.  Based upon the court filings, Chrysler will have one traditional car plant in North America with the fullsize, rear- wheel drive Brampton plant (Figure 5).  The Sterling Heights plant that builds the midsize cars will be closed.  The remaining plants currently manufacture trucks, vans, SUVs and crossovers.

In my opinion, Chrysler could still consolidate at least two plants.  Before the bankruptcy, Chrysler continued to overestimate the production targets for the next generation Dodge Durango and Jeep Grand Cherokee be built at Jefferson North as well as the replacements for the Chrysler 300 and Dodge Charger in Brampton. Given the damage to the brand because of the bankruptcy, tighter fuel economy requirement and a likely slow economic recovery, Chrysler over estimated real retail demand by about half for both plants.

I will go as far as question the need for the Durango and further consolidate the Jeep Grand Cherokee production into Toledo along with the Jeep Liberty.  If that move were made Jefferson could be closed.  The relevance of the Brampton rear-wheel drive cars is also questionable.  The full-size car market just does not command the volume it once did even during better years.

Furthermore, I believe Chrysler’s restructuring and plant allocations is irresponsible as it is based upon over optimistic expectations of Fiat’s contributions to plant utilization.  It is very unlikely Fiat based or branded vehicles will account for 400,000 to 600,000 vehicles by 2013 or 2014.  Chrysler/Fiat will not generate that sort of volume in small cars for US consumption or even when including export.  Last year Chrysler only sold a little over 200,000 small platform based vehicles and most were fleet sales (Jeep Compass and Patriot, Chrysler PT Cruiser and Dodge Caliber).

Fiat also does not have a midsized passenger car platform that it could share with Chrysler.  Midsized vehicles are the heart of the US passenger car and crossover market.  Fiat also does not have hybrid powertrains available to share with Chrysler to make a legitimate attempt to achieve volume in this segment.  Chrysler sold 180,000 midsize based vehicles last year which included the Dodge Journey crossover, Chrysler Sebring and Dodge Avenger. GM (180,000 Malibus) and Ford (140,000 Fusions) have done well in recent years, however, they still do not command the 400,000 volume Honda Accords or Toyota Camrys command. 

Fiat under its own brand will not generate substantial volume in the US any time soon after launch.  VW, which has been well established in the US, only sells about 400,000 vehicles in the US during a good year.  Kia and Hyundai combines sell 700,000 vehicles after being in the US for 20 years.  Toyota’s Scion, GM’s HUMMER,  BMW’s MINI, and Daimler’s Smart brand have not reach significant volumes after initial introduction in the US.  Scion has struggled even with Toyotas “golden” reputations to achieve the numbers Fiat expects.  In a better economy Toyota could 150,000 Scions and this year that looks to be cut in half.  For that reason I do not expect Fiat brand vehicles to sell more than 50,000 to 70,000 vehicles under its own name by 2013 or 2014.

That brings me to the questionable financial estimates that Capstone filed with the court.  I certainly do not believe their revenue estimates and questionable judgment in preparing their analysis.  Chrysler estimates net revenue for the first half of 2009 to be $10.4 billion and will more than double in the second half for a total of $30.1 billion for the year.  Given the situation with production shut down, that seems unlikely to be met.  Even more concerning are the revenue estimates through 2016.  It is just not believable that Chrysler’s gross revenue will double by 2016 selling low priced Fiats small cars.  Certainly Chrysler’s revenue will not benefit as the product mix shifts from revenue pickup trucks, Jeeps and vans.  Also of interest are the estimates for fixed cost, which is estimated, to remain relatively constant even with all the near term restructuring.  The variable cost to gross revenue seems a little optimist at 68% but a reasonable estimate.  Overall I am very skeptical over the revenue projection to the point where I believe due care was not taken and the most conservative estimates presented.  Daimler could not achieve those numbers with Chrysler selling vehicles with a much higher price point.


The future for Chrysler is still uncertain, as I believe the business case presented is unrealistic and very weak. For the above reasons I just do not believe Chrysler can generate the revenue estimated in the Capstone analysis.  My revenue doubts are therefore reflected in Chrysler not likely having anything close to $21 billion in cash by 2016 or the ability to even generate positive cash flow by 2012.

The restructuring presented just did not go far enough.  The plans need to close more plants and even consider phasing out either the Dodge or Chrysler brands as GM will do with HUMMER, Saturn and Pontiac.  There was also no discussion of selling off Jeep to raise capital for the new company and that includes Tom LaSorda's lengthy affidavit to the court outlining his attempts to align with other auto companies.  Furthermore, there was no consideration as to how Fiat will be integrated into the new company as I remain very skeptical of a business plan based upon introducing new brands to the US market (Fiat and Alfa Romeo) and built upon low revenue small cars.

When all is said and done, this exercise is not about saving Chrysler but saving face for the Obama administration.  If not for the Fiat alliance, Chrysler would have to be liquidated as no other suitable suitors have stepped up to take on the company.  With the Fiat offer out there, the government has to give the appearance it is making an attempt to save jobs and protect the company's retirees.  Chrysler's situation will not change under Fiat and will likely have to close more plants especially if the current market conditions persist or remain relatively depressed.  Fiat also gives the administration a scape goat if the alliance falls a part.

More importantly, the bankruptcy is really just a test run for GM if the unsecured lenders do not flinch and accept enough equity in the company by the end of this month.  The restructuring plan GM presented a couple weeks ago is robust and will likely need court protection to accomplish what was outlined.



Chrysler Restructuring Homepage

Declaration of Thomas W. LaSorda

Declaration of Robert Manzo

Affidavit of Ronald E. Kolka in Support of First Day Pleadings

C-Span: Pres. Obama Announces Chrysler bankruptcy & partnership with FIAT (Video)

Obama Administration Press Release

Chrysler LLC-Fiat Group Alliance Press Release

United State Bankruptcy Court – Southern District of New York

Transcript: President Obama’s Remarks On Chrysler

Obama Administration Auto Restructuring Initiative Chrysler-Fiat Alliance

The Bankruptcy – Litigation Blog

Union Takes Rare Front Seat in Deal for Chrysler, NY Times, May 2009

Statement From Non-Tarp Lenders of Chrysler, WSJ, April 2009

Chrysler files for bankruptcy, forms alliance with Fiat, Automotive News, April 2009

Union Takes Rare Front Seat in Deal for Chrysler, NY Times, May 2009



Entire contents © 2007 - 2009 The Automotive Lyceum All Rights Reserved


Thu May 07, 2009 3:18 amThis morning the Detroit News was reporting a majority of the resistive secured investors were now agreeing to the Treasury’s plan to relieve Chrysler of its current debt. (See link for details)

Chrysler lenders agree to deal with Treasury plan, Detroit News, May 7 2009

“The holdout creditors own $295 million of the automaker's $6.9 billion in distressed debt -- much less than previously disclosed, bolstering Chrysler's case for a speedy exit from bankruptcy.
The committee representing the objecting creditors disclosed their identities Wednesday, as required, in U.S. Bankruptcy Court. They include Stairway Capital Management, Oppenheimer Senior Floating Rate Fund and Foxhill Opportunity Master Fund. “

Tue Jun 09, 2009 4:44 pmThe United States Supreme Court declined Tuesday evening to hear a challenge to the Chrysler bankruptcy settlement, clearing the way for the sale of Chrysler’s key assets to a group led by Fiat as soon as Wednesday morning.

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