Chrysler, Fiat: Back from the Brink?

Italian automaker Fiat (FIA.MI) moved much closer to a deal with Chrysler on Apr. 28 that will blend the two companies' operations and likely keep Chrysler out of bankruptcy court.

The breakthrough came when a committee representing bank and private equity lenders that hold 75% of Chrysler's $6.9 billion in debt agreed with the White House auto industry task force and Chrysler owner Cerberus Capital Partners to take just $2 billion of what it's owed, along with 5% of the company's equity.

The automaker is still not safe from Chapter 11, though. A group of smaller banks that collectively hold 25% of the debt also need to be brought into line. The White House is looking for at least 90% participation by the lending banks before providing more government financing that will keep the automaker out of bankruptcy. Unless the White House extends its deadline, the wooing process needs to conclude by Apr. 30.

One executive working with the debt holders says that smaller banks are complaining that the big banks, who were recipients of Troubled Asset Relief Program (TARP) bailout funds, succumbed to political pressure, striking a weaker deal than what they had been negotiating for.

Better Terms for the UAW?

On Mar. 30, President Obama said his task force concluded that Chrysler could not continue as an independent entity, and that the U.S. Treasury would not extend any more loans to Chrysler past that Apr. 30 deadline unless it struck a deal with another automaker, its unions, and lenders, and showed financial viability.

Debt holders have been complaining that the United Auto Workers were getting much better terms from the White House, and they have been holding out for a better deal. On Sunday, the UAW struck an agreement that gives the union's Voluntary Employee Benefit Assn. (VEBA) health-care trust fund $4.5 billion in Chrysler stock, or about 55% of the fund's total financial backing. A VEBA representative will also hold a seat on Chrysler's board of directors.

A Treasury official indicated that the ongoing negotiations definitely boosted the odds in favor of Chrysler steering clear of bankruptcy court. "The agreement from Chrysler's principal banks is an exceptional accomplishment in line with the President's firm commitment that all stakeholders sacrifice to make this deal succeed," the official said.

While Obama Administration officials have talked tough about forcing both Chrysler and General Motors (GM) into bankruptcy in the last month, there is also a desire to avoid it. "Actual Chapter 11 brings a lot of unknowns for how the consumer will react," says independent marketing consultant Dennis Keene. "Especially now, having hit what we think is the bottom of sales and consumer confidence, Chapter 11 would be a setback for everyone."

Benefits Lost

The UAW has agreed to cuts in wages, overtime pay opportunities, vacation days, and to the elimination of the so-called Jobs Bank, which continued to pay workers after they were terminated. Retirees will also lose their dental and vision insurance coverage. UAW President Ron Gettelfinger couldn't be reached for comment on Apr. 28. But in a letter to members he said, "We fought to maintain our wages, our health care, and our jobs. … In the face of adversity, we secured new product guarantees, and we negotiated new opportunities for UAW involvement in future business decisions."

Part of the agreements call for Fiat to build a small car in the U.S. with union workers. They also specify engines that will be made available to Chrysler and built in the U.S., assuring that some future Chrysler models will continue to be built domestically.

"The UAW is under a great deal of pressure, but the deal they struck was very necessary," said Canadian Auto Workers President Ken Lewenza. The CAW cut a deal with Chrysler last weekend. "The unions have done a great deal to make this deal happen."

Envisioning a New Chrysler

What Chrysler looks like after Fiat begins retooling the company remains to be seen. The Jeep brand is widely considered to be the most valuable asset. Part of the plan calls for Fiat to distribute Jeep models through its European and South American network, which could quickly enhance the company's sales.

The two companies also have been exploring whether they can take some existing Fiat vehicles and rapidly modify them to be sold as Dodges and Chryslers in the U.S.

Of course, all those plans depend on Chrysler, its banks, and the White House crossing the finish line.

Before it's here, it's on the Bloomberg Terminal.