Chrysler bankruptcy filing said to be part of plan to seal Fiat deal

Chrysler LLC and Fiat S.p.A. are prepared to complete an alliance by Thursday that would be taken into bankruptcy court as a key element of the U.S. automaker's restructuring plan if needed, a person with direct knowledge of the situation said.

President Obama is planning to announce that Chrysler will file for Chapter 11 bankruptcy protection as it wraps up the Fiat deal, Bloomberg News reported. The Wall Street Journal said two versions of Obama's speech are being readied--one if Chrysler files for protection and another if it avoids bankruptcy. The Washington Post said Chrysler CEO Bob Nardelli would be replaced by Fiat management under a bankruptcy plan being developed.

The Journal also reported that talks between the U.S. Treasury Department and a group of holdout lenders collapsed late Wednesday, making a Chrysler bankruptcy "all but certain." The paper cited people familiar with the matter.

Obama, in an address to the nation Wednesday night, said he's more hopeful than he had been that "a viable Chysler" can emerge from the crisis. He said it's not yet clear if Chrysler will have to file for bankruptcy--and if it does "it will be real quick."

He spoke on the eve of Chrysler's government-imposed deadline to forge the deal with Fiat and secure concessions from the UAW and creditors in order to qualify for additional U.S. rescue loans.

The UAW late Wednesday ratified cost-cutting contract terms that would also cut in half the remaining cash portion of Chrysler's $10.6-billion obligation to a trust fund for retiree health care.

If some Chrysler lenders reject an offer from U.S. officials to take $2 billion in cash in exchange for debt, a Fiat-Chrysler deal would be part of the plan submitted to a bankruptcy judge, according to the source who spoke on condition of anonymity about the merger discussions.

A separate government source familiar with the negotiations said Chrysler will survive and avoid liquidation, but whether it will file for bankruptcy hasn't been determined. Chrysler spokesman Todd Goyer and a spokesman for Chrysler majority owner Cerberus Capital Management LP declined to comment.

Creditors

The Treasury Department has reached an agreement with Chrysler's largest creditors to cancel $6.9 billion of debt in exchange for $2 billion in cash. But the deal still must get unanimous approval from all the debt holders.

A person knowledgeable about the talks said Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital are the holdouts. Oppenheimer declined to comment while spokespersons for the other two lenders didn't return phone calls.

The Michigan congressional delegation and the administration are in contact with the holdouts in an attempt to get them to reach a deal, this person said.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., estimated the likelihood of a Chrysler bankruptcy at 50-50.

"The higher the threat of death is, the more likely it can be worked out," he said. "The wild card is whether any of the remaining bond holders have taken out insurance policies that pay them in full if Chrysler fails. If anybody benefits more from a bankruptcy than from no bankruptcy, then you have a problem stopping it."

Cole said beyond the remaining bondholders, the Obama administration must still negotiate a deal with the dealers it insists Chrysler eliminate to avoid a bankruptcy. That is virtually impossible to do quickly with a large body of dealers, but if Obama's team can find a settlement pattern before the deadline--cash or perhaps equity in Chrysler--details could be worked out later, Cole said.

Douglas Bernstein, a partner at law firm Plunkett Cooney in Bloomfield Hills, Mich., said the automaker can't shed a large block of dealers without court protection.

"Chrysler still needs a bankruptcy filing," Bernstein said. Even if Chrysler reaches agreement with all its bondholders, it has to rely on a bankruptcy judge to cancel dealer franchises or face the prospect of years of dealer lawsuits in multiple states, he said.

Obama's update

In St. Louis on Wednesday, Obama said he was hoping a tie-up would be worked out but said he was not sure "if the deal is going to get done."

"We're hoping we can get a merger where the taxpayers will put in some money to sweeten the deal but ultimately the goal is--we get out the business of building cars and Chrysler goes and starts creating the cars that consumers want," Obama said in a town-hall style meeting near St. Louis.

"We don't know yet whether the deal is going to get done," Obama said. "I will tell you that the workers at Chrysler have made enormous sacrifices--enormous sacrifices--to try to keep the company going.

"One of the key questions now is, are the bond holders, the lenders, the money people, are they willing to make sacrifices, as well? We don't know yet, so there's still a series of negotiations that are taking place."

Earlier, White House spokesman Robert Gibbs told reporters: "Hurdles still remain, but we remain optimistic and hopeful that something in the next many hours will get done that will provide a pathway for Chrysler's viability without continued government assistance." The automaker is surviving on $4 billion in U.S. loans.

Chrysler's Nardelli, in a letter to employees Wednesday, said the automaker continues to make progress in its efforts to complete the proposed alliance.

"If approved, it would clear a significant hurdle on our continuing journey toward long-term success, but the proposed agreement still needs to be approved by all of the secured lenders," Nardelli said in the memo.

By Automotive News