Chrysler LLC on Thursday filed for bankruptcy reorganization at the behest of the U.S. government after failing to reach an agreement with a small group of creditors.
'This process will be quick, it will be efficient,' U.S. President Barack Obama said in a televised address.
The Obama administration, which led the Chrysler reorganization talks because it has provided loans to keep the car maker operating, expects a relatively speedy bankruptcy proceeding that could be wrapped up in as little as 30 to 60 days.
The government, which already has provided more than $4 billion to Chrysler, said Thursday it would commit to a further $8 billion to help the company through bankruptcy.
At the same time, Mr. Obama announced that Italian car maker Fiat SpA had agreed to enter into an alliance with Chrysler. Under it, Fiat will provide the U.S. company with technology for small, fuel-efficient models.
For Chrysler, the bankruptcy filing and Fiat pact represent a chance to end years of losses and declining market share. The car maker suffered from high labor and production costs and union agreements that required it to provide extensive health care and other benefits to 115,000 retirees.
Chrysler's plight intensified last year when high gasoline prices dissuaded customers from buying its sport-utility vehicles and pickup trucks, the company's main source of profits. Meantime, the company had de-emphasized small cars in recent years and it had a sparse selection at a time when consumers were seeking them.
A New York bankruptcy court is expected to handle the restructuring, which could be easier to push through because, unlike the out-of-court talks, it doesn't need approval of all creditors. A simple majority will suffice, and large creditors, including U.S. banks J.P. Morgan Chase & Co. and Citigroup Inc., are already believed to support the plan.
In his noon address, President Obama took a tough stance against what he described as the small group of 'speculators,' the debt holders that had held up the Chrysler restructuring. The bankruptcy proceedings are 'designed to deal with those last few holdouts,' Obama said.
The holdouts, including hedge funds and pension funds, may choose to fight the court proceedings, which could derail the government's timetable. In a statement released Wednesday before the president's address, they questioned the administration's willingness to negotiate, saying their own offer was 'flatly rejected or ignored.'
If the court plan is approved, Chrysler's car-making operations will be sold to a new company, which would emerge from bankruptcy under entirely new ownership and without the onerous obligations to creditors and employees.
Chrysler's existing owners, private-equity fund Cerberus Capital Management LP and Germany's Daimler AG, would lose all their holdings, and a health-care trust fund for retirees will emerge as the new majority owner, with a 55% stake.
Under its partnership, Fiat initially will receive a 20% stake in Chrysler but it could rise to 35% if certain targets are met. Fiat has the option of becoming a majority shareholder once the U.S. loans have been repaid.
The U.S. Treasury Department, meanwhile, will own 8% of Chrysler, and the governments of Canada and Ontario, which will provide $2.4 billion in financing, will hold a combined 2% stake.
The car maker's 54,000 employees and its 115,000 retirees, represented by the United Auto Workers union, late Wednesday approved their part of the bargain, eliminating a number of benefits.
Shortly after the president's speech, Chrysler Chief Executive Bob Nardelli said he would resign, returning to work for Cerberus, which had appointed him to run the company in August 2007.
Chrysler said it will temporarily idle most of its manufacturing plants for as long as 60 days starting Monday as the company seeks to reorganize.
As part of the agreement, Chrysler's lending arm, Chrysler Financial, will be folded into GMAC LLC, which will become the main financing source for all Chrysler vehicles. A group of investors led by Cerberus holds a majority stake in GMAC.
The U.S. government will have the power to appoint board members at the reorganized Chrysler but won't get involved in day-to-day operations, an administration official said.
The groundwork for the revamping includes a cost-cutting deal ratified by the United Auto Workers union late Wednesday. Another Treasury-brokered agreement calls for Chrysler's lenders to accept $2.25 billion in cash in exchange for wiping out about $6.9 billion of Chrysler's debt. Though some creditors balked at that offer the administration official said Thursday that he expects those agreements to be kept largely intact by a bankruptcy judge.
The new government loans include between $3 billion to $3.5 billion in so-called debtor-in-possession financing and an additional $4.5 billion once the company emerges from court, administration officials said Thursday.
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