Chrysler Faces Roadblocks, Analysts Say

By Kendra Marr
Washington Post Staff Writer
Tuesday, April 14, 2009

Restructuring Chrysler is a daunting task.

By the end of this month, the automaker must persuade creditors to trim its massive debt, renegotiate how it will pay for the union's retiree health benefits, battle state franchise laws to quickly close dealerships and complete an alliance with Fiat. Otherwise, the government cuts off its loans.

As Chrysler's deadline draws nearer, more and more analysts are doubting that the automaker has enough time to meet those targets. And without federal loans, they say, the automaker will be forced into bankruptcy -- or even liquidation.

Not everyone says bankruptcy would be such a bad thing, since Chrysler could be worth more in pieces than as a stand-alone company.

Chrysler spokeswoman Lori McTavish said, "Chrysler is committed to working closely with all constituents" within the time constraints to "reach a successful conclusion."

Yet the automaker, which has received $4 billion in federal loans, has yet to announce any victories in its quest to win stakeholder concessions. Most recently, banks and hedge funds refused the Treasury Department's proposal to reduce Chrysler's $7 billion in debt, according to people familiar with the matter. And the union and dealers so far haven't moved to revise their contracts.

General Motors has an additional month to make the same concessions, minus forming a partnership.

"Doing all that is extremely difficult to do in the best of times," said Aaron Bragman, an auto analyst with IHS Global Insight. "To do that now, without the aid of a court, is frankly practically impossible."

For a Fiat alliance, bankruptcy could be a key tool to force stakeholders to take a haircut, analysts said. Previously, the Italian automaker had been unwilling to enter a partnership until Chrysler brokered concessions. Now that the government is forcing the marriage, and offering $6 billion in loans as incentive for a deal, bankruptcy could be the tactic Fiat needs to clean the company's balance sheet.

But without Fiat, Chrysler faces a more precarious fate. The Obama administration has said Chrysler cannot survive on its own. It is doubtful the automaker will emerge from bankruptcy as one reorganized entity, given the difficulty of securing debtor-in-possession financing in this tight credit market and plummeting auto sales, according to a recent Standard and Poor's report.

"It would be broken up and sold," S&P analyst Gregory Maddock said.

Analysts point out that Jeeps, Chrysler minivans and Dodge trucks are strong products that would complement a manufacturer with a small lineup. Chrysler's dealer and distribution network would be attractive to a foreign automaker, like Fiat, that is trying to enter the American market.

Chrysler has more value in pieces than intact, analysts said. As a stand-alone company, it would continue to bleed cash and need federal aid, they said. Through liquidation, the company would at least be able to pay back government loans and debtholders.

"The problem is that there are very few buyers because the markets are still frozen," Bragman said. "That makes a liquidation somewhat problematic."

But, as the smallest of Detroit's Big Three automakers, Chrysler's departure would hurt few suppliers because they also make parts for Chrysler's rivals, said David Whiston, an analyst with Morningstar.

"It's still going to be bad, but it wouldn't be anywhere near as catastrophic as a GM bankruptcy," he said.

Whiston said it seems as if the government purposefully gave Chrysler this unrealistic mission.

"They just decided: 'You know what? The American auto industry is getting smaller. If we're going to lose one, we'll lose Chrysler. So we'll play hardball with them,' " he said.

He added: "The more I think about it, I don't see any kind of happy ending for Chrysler."

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