The White House auto industry task force and negotiators for Chrysler are asking banks holding some $6.9 billion in secured debt to take just $1 billion as the automaker tries to avert bankruptcy by the end of this month.
But the banks—JP Morgan Chase, Citibank, Goldman Sachs and Morgan Stanley, which hold 75% of the debt—are remaining steadfast in refusing the deal. Their recourse, since their debt is secured by Chrysler assets such as the Jeep brand and factories, is to take their chances in a bankruptcy filing and hope they get a better deal when the assets are sold. Other lien holders include hedge funds—Elliott Management, Stairway Capital Management and Perella Weinberg Partners.
There is risk in that strategy, considering the dire straits of the credit markets and shortage of buyers. Ford has been shopping its Volvo unit for two years without a deal in place yet. GM has been shopping Hummer for more than a year. Thomas Stallkamp, partner in private equity firm Ripplewood Holdings, says it is very difficult to assess real market value for assets like Jeep and Chrysler’s factories. “There is so much over capacity and still a shortage of credit…I don’t think anyone knows how much they would bring in liquidation,” says Stallkamp, who was formerly President of Chrysler before Daimler-Benz bought the automaker in 1998.
That uncertainty and risk is what is driving Cerberus to play hardball with the banks, say analysts watching the deal.
Banks and hedge funds holding the secured debt are looking for some equity in Chrysler for accepting such a haircut on the debt, assuming the automaker forges an alliance with Italian automaker Fiat. That deal is contingent on Chrysler getting a $6 billion government loan, which in turn depends on Chrysler getting a huge concession from its debt holders and the United Auto Workers union by April 30.
If the Chrysler-Fiat alliance is successful, the banks argue, they should be able to share in the success in exchange for taking the sacrifice now.
The UAW is being offered equity in exchange for giving up half the $9 billion Chrysler owes the union’s Voluntary Employee Benefit Association, which administers health care coverage to Chrysler’s workers and retirees.
The union and bond holders at both Chrysler and GM have been in a poker game of sorts, trying to make sure one doesn’t get a better deal than the other.
The proposed deal to save Chrysler now calls for Fiat to get 20% of Chrysler in exchange for the Italian automaker sharing vehicle and engine technology with Chrysler. The barter arrangement has been estimated to be worth $10 billion to $12 billion. After the company repays the federal government $10 billion in loans, the proposed deal says, according to sources familiar with the negotiations, Fiat would be allowed to buy more than an additional 30% of Chrysler—a majority ownership—for around $50 million. “The deal presented to the lenders right now is completely inequitable,” says one representative of a bank on the debt holders committee not authorized to speak on the negotiations.
Based on the terms Fiat is being offered by Chrysler owner Cerberus Capital Management LLC, senior debt holders should be offered at least 25% equity in the company going forward, said the bank official. The White House has already told Cerberus that it should consider its equity in the automaker gone. “There is only so much equity…just so many slices in the pie and that is what is being fought over,” said the same bank representative.
If the Fiat deal goes through, there will likely be substantial management changes at Chrysler, says an executive briefed on the talks. Fiat CEO Sergio Marchionne will likely hold the title of either chairman or CEO of Chrysler. Current chairman and CEO Robert Nardelli, installed by Cerberus in 2007, will likely retire from the position since Cerberus will likely have no equity left in the automaker. Possible roles for vice chairman James Press and vice chairman Tom Lasorda have not been ironed out yet, the same executive said.
If a deal satisfying the White House auto industry task force is not reached by April 30, Chrysler will be forced into bankruptcy without the White House and U.S. Treasury taking an active role by providing Debtor-In-Possession (DIP) financing. Without another source of DIP financing, Chapter 11 bankruptcy would transition to Chapter 7 liquidation, with Jeep and Chrysler’s other assets auctioned off.
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