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Talks Tip Chrysler Toward Bankruptcy
As Negotiations With Creditors Falter, Officials Finalize Details of Restructuring

By David Cho, Peter Whoriskey and Kendra Marr
Washington Post Staff Writers
Thursday, April 30, 2009

The Obama administration last night planned to send Chrysler into bankruptcy, replace chief executive Robert L. Nardelli and pump billions of dollars more into the effort, all in hopes the company can emerge from court proceedings as a reenergized competitor in the global economy.

Government officials clung to 11th-hour hopes last night that bankruptcy could be averted, but talks broke down with Chrysler's creditors. A bankruptcy filing could happen as soon as today.

The U.S. government's attempt to save the automaker amounts to another extraordinary intervention in the economy and a landmark event in the history of the American auto industry.

Under the administration's detailed court strategy, ownership of Chrysler would be dramatically reorganized, the leadership of Italian automaker Fiat would take over company management and the U.S. and Canadian governments would contribute more than $10 billion in additional funding.

Company and government officials had feared that a bankruptcy would stain the brand, shake customer confidence and erode sales, but the administration said it would seek to use the process to create a new Chrysler company. Its ownership would be divided, with the company's union retiree health fund receiving a 55 percent stake, Fiat would claim as much as a 35 percent share and the United States would take 8 percent. The Canadian government would receive two percent.

The automaker's current majority owner, the private-equity firm Cerberus Capital Management, would have its holdings wiped out.

During the bankruptcy, the governments would provide about $4 billion in new funds, with 80 percent coming from the United States and 20 percent from Canada, which hosts a number of Chrysler operations. As the company emerged from its reorganization, the United States would provide roughly another $5 billion, with more coming from Canada, the sources said. The sources warned, however, that the figures were fluid.

Particularly striking to some economists and historians is that the plan turns over ownership of a major U.S. industrial company to an employee-run trust, a deal that is "unprecedented on this scale," according to Harley Shaiken, a University of California at Berkeley professor and expert on unions.

The government plan also calls for ensuring that Chrysler maintains substantial U.S. manufacturing operations. It requires that at least 40 percent of company sales volumes remain manufactured domestically, or for the company's total production in this country to remain at least at 90 percent of its U.S. production last year.

"Anyway you cut it, the union is going to be a major presence at the company," Shaiken said.

One key issue, however, will be who appoints the restructured Chrysler's board of directors.

The government's bankruptcy plan envisions a company with nine board seats, three of them appointed by Fiat. It does not specify who would appoint the rest.

In April, Nardelli sent a letter to employees indicating that the U.S. government would play a key role.

"Upon successful completion of the alliance, a board of directors for Chrysler will be appointed by the U.S. government and Fiat," he wrote. "The majority of the directors will be independent (not employees of Chrysler or Fiat)."

Negotiations between the government and the company's stakeholders -- Chrysler's lenders, the union and proposed merger partner Fiat -- went well into the night, as dealmakers rushed to meet President Obama's April 30 deadline.

Last night, the United Auto Workers union overwhelmingly ratified the administration proposal to give its retiree health fund the 55 percent equity stake in Chrysler. In exchange, the health fund must give up its claim to much of the $10 billion that Chrysler owes it. Eighty-two percent of production workers and 80 percent of skilled-trades workers voted for the agreement.

"This has been a challenging time filled with anxiety and uncertainty for our membership," said UAW President Ron Gettelfinger in a statement. "Our members have responded by accepting an agreement that is painful for our active and retired workers, but which helps preserve U.S. manufacturing jobs and gives Chrysler a chance to survive."

Fiat also continues to negotiate its merger, though the structure of that deal is in place: Fiat would get a 20 percent stake in the U.S. automaker in exchange for its small-car technology and global distribution network. If the company reaches performance milestones, it could gain as much as a 35 percent stake.

Fiat intends to form an alliance with Chrysler even if the company goes into bankruptcy, said a source familiar with the talks.

The Italian carmaker has been, "like everyone else, sitting around waiting for the rest of the lenders to strike a deal," the source said.

Indeed most of the friction in the Chrysler dealmaking has revolved around efforts to get the company's secured lenders -- to whom Chrysler owes $6.9 billion -- to accept a small fraction of that amount.

The Treasury Department is pressing them to write that down to $2.25 billion, and officials spent much of yesterday in last-minute negotiations with the lenders.

While four of Chrysler's major creditors -- J.P. Morgan Chase, Citigroup, Goldman Sachs and Morgan Stanley -- have agreed to the Treasury's plan, other lenders, mainly hedge funds, had held out. The holdouts included Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital, two sources said. The last two have funds that invest in "distressed" companies. It is not known what companies ultimately failed to reach agreement with the government.

The hedge funds likely think they could get a better return in a bankruptcy filing or in a sale of Chrysler's assets, said Sheldon Stone, a turnaround expert at Amherst Partners. The government offer made yesterday would represent a recovery of about 32 cents on the dollar. A recent Standard & Poor's analysis said the lenders could recover 30 to 50 cents on the dollar.

"These rogue hedge funds are not coming in line because they feel like the government is attempting a cramdown, which is essentially a take it or leave it deal," Stone said.

Because those hedge funds continued to resist efforts to make such a deal, a bankruptcy filing appears to be inevitable.

Bankruptcy enables a company to shed some debt and other obligations, and a court could force the recalcitrant hedge funds to accept the deal that the large banks have.

The court proceedings could also help the company cut the costs of closing some of its 3,200 Chrysler, Jeep and Dodge dealerships. Because some state franchise laws prevent automakers from forcing dealers to close, it can be expensive to buy them out. In bankruptcy, however, a judge could eliminate dealerships.

Fearing this prospect, the National Automobile Dealers Association has hired a law firm to protect Chrysler dealers in case of bankruptcy.

Despite the advantages, the damage to Chrysler's name and the uncertainty about the duration and outcome of the court proceedings had government officials planning to work late in last-ditch attempts to avert that possibility.

Whatever the outcome, Obama told reporters last night that he is hopeful that Chrysler can once again become viable.

"I'm feeling more optimistic than I was about that getting done," he said.

Staff writer Steven Mufson contributed to this report.

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