- The Washington Times - Thursday, April 30, 2009

UPDATED:

DETROIT (AP) — Chrysler will survive. At least for now, even if it’s forced into bankruptcy court.

The No. 3 U.S. automaker faces a government deadline of 11:59 p.m. Thursday to have deals in place with labor, creditors and Italian automaker Fiat. Two of the three pieces appear to be in place. A small group of debtholders are the remaining obstacle, as they hold out for a better deal from the U.S. government.

Talks between Chrysler LLC’s lenders and the Treasury Department to reduce the automaker’s secured debt and keep it out of bankruptcy protection broke down early Thursday morning, a person familiar with the talks said.

Four banks with 70 percent of Chrysler’s $6.9 billion debt had agreed to erase it for $2 billion, or less than 30 cents for each dollar held. That left Chrysler’s fate in the hands of about 40 hedge funds with about 30 percent of the debt.

To entice the hedge funds into going along with the banks, the government on Wednesday afternoon added $250 million to the $2 billion that the banks had settled for and gave the hedge funds a 6 p.m. deadline to work it out, two people briefed on the talks said.

The collapse of the talks means Chrysler will likely have to file for Chapter 11 bankruptcy protection, unless a deal can be salvaged by the government’s deadline. Others briefed on the negotiations said that in order for Chrysler to get a deal without bankruptcy, it needs to get 100 percent of its creditors to sign on.

Two of the government’s requirements to ensure Chrysler’s survival are in place. Italian automaker Fiat is expected to sign on as a Chrysler partner sometime Thursday, according to two people briefed on the talks. The United Auto Workers ratified a cost-cutting deal Wednesday night.

A bankruptcy filing wouldn’t mean the end of the company. The people said plan B is for Chrysler to file for Chapter 11 with funding from the government. Under the bankruptcy law that Chrysler would file under, a judge would decide how much creditors would get, but is likely to go with any settlement agreed to by the majority of the creditors, the people said.

All of the people spoke on condition of anonymity because the negotiations were private.

If it files for bankruptcy, Chrysler would continue operating and Fiat would still sign on as a partner on Thursday, the people said. The government already has promised to back Chrysler’s warranties in an effort to allay customers’ fears that the automaker wouldn’t be around to honor them.

President Barack Obama’s auto task force in March rejected Chrysler’s restructuring plan and gave it 30 days to make another effort, including a tie-up with Fiat. The company has borrowed $4 billion from the federal government and needs billions more to keep operating. President Obama said Wednesday night while the lender talks were still ongoing that he was “very hopeful” that deals can be worked out to keep Chrysler LLC a viable automaker, and more hopeful than he was a month ago that the company will stay in business.

The UAW agreement, which will take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler’s U.S. facilities and to share key technology with Chrysler.

Meanwhile, the Fiat partnership means Chrysler CEO Robert Nardelli could be out of a job. In an April e-mail to employees, he said that if the deal is completed, Chrysler would be run by a new board appointed by the government and Fiat. The new board, Nardelli wrote, would pick a CEO “with Fiat’s concurrence.”

Sergio Marchionne, CEO of the Italian automaker, told reporters earlier this month that he could run Chrysler. Obama said Wednesday that Fiat’s management “has actually done a good job transforming their industry.”

Ben Feller reported from Washington. Associated Press Writers Colleen Barry in Milan, Italy, Kimberly S. Johnson in Detroit and David Eggert in Lansing, Michigan, contributed to this report.

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