Holdouts Jeopardize Debt Plan for Chrysler
April 29, 2009
By BILL VLASIC
nytimes.com
DETROIT — The Obama administration is prepared to force Chrysler into bankruptcy by the end of the week unless it gets unanimous consent from a group of banks and hedge funds to retire the automaker’s debt.
The Treasury Department has told the lenders — 46 creditors in all — that they must accept $2 billion in cash to eliminate about $6.9 billion in secured debt by a deadline on Thursday.
Anything short of total agreement to the terms would cause a bankruptcy filing, people close to the negotiations said Tuesday. None would agree to be identified because the talks have not been completed.
The four largest banks in the group — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — have agreed to the terms. Together, they hold about 70 percent of Chrysler’s debt.
But some smaller banks and hedge funds are still balking at the terms, setting the stage for a tense final two days in which the fate of Detroit’s third-largest automaker will be decided.
Chrysler, which is subsisting on $4 billion in federal loans, is under a mandate from Mr. Obama to cut its labor costs and debt and complete an alliance with the Italian automaker Fiat if it is to get further government assistance.
People close to the talks said Tuesday that the White House has not yet made its final call on whether to force a bankruptcy filing. It was not clear whether Chrysler would use cash it currently has or new loans to pay off the lenders.
The United Automobile Workers union has fulfilled one critical element of the president’s mandate for shared sacrifice among all parties involved in Chrysler’s rescue.
Union leaders on Sunday agreed to a complex deal that changes work rules, cuts benefits and gives the union a 55 percent stake in Chrysler as partial funding for its retiree health care trust.
The company’s 26,000 workers represented by the U.A.W. began voting on the agreement Tuesday, with the balloting expected to be completed by Wednesday night.
Alliance talks between Chrysler and Fiat are also continuing and are likely to produce a signed agreement by the deadline, according to people familiar with those discussions. But without agreement from the assorted lenders, bankruptcy appears inevitable.
One analyst, Brian Johnson of Barclays Capital, said Tuesday that the Treasury appeared determined to “cram down” the terms on dissenting lenders, in court if necessary. If Chrysler enters bankruptcy, only a majority of the company’s secured lenders are needed to initiate the government’s debt proposal.
“Regardless of the outcome, we believe it is increasingly clear that Chrysler will be restructured and avoid liquidation,” said Mr. Johnson.
Meetings between the banks and other lenders are scheduled for Wednesday. Meanwhile, members of Michigan’s Congressional delegation urged the creditors to do their part to keep Chrysler out of bankruptcy.
“It is now essential that the remaining holdouts among the secured creditors demonstrate a commitment to Main Street and the U.S. industrial base,” the members said.
Talks are also continuing between Chrysler and Fiat, although people close to the discussions said there appeared to be no major obstacles to completing their alliance by the Thursday deadline.
Fiat has agreed to contribute small cars, engines and other technology to Chrysler, in exchange for an initial 20 percent ownership stake and influence over Chrysler’s board and management. Fiat could increase its stake up to 35 percent by meeting certain performance objectives.
The Fiat alliance has also drawn full support from the U.A.W., whose members made big concessions to stave off the failure of Chrysler.
In a letter to Chrysler workers, the union’s president, Ron Gettelfinger, said the concessions were “essential to securing federal loans to keep Chrysler in business.”
Union workers began voting on the deal at factories across the country on Tuesday.
The deal calls for the union to take a 55 percent stake in Chrysler to cover half of the company’s $10 billion obligation for retiree health care. Another $4.6 billion in cash will be contributed to the trust in installments over the next 15 years.
It was not an easy decision for union members to accept stock in Chrysler as part of its health care trust, but they have little choice, said one labor expert.
“They’re going to accept it reluctantly because they have no other option,” said Gary N. Chaison, a professor of industrial relations at Clark University in Worcester, Mass. “The only way the U.A.W. can sell this is by saying that if they didn’t accept this, it would be straight to bankruptcy.”
The union’s trust will, in effect, become Chrysler’s biggest shareholder overnight. It also may have a seat on the company’s reconstituted board of directors. “The union will never be the same and the industry will never be the same,” Professor Chaison said.
The health care agreement at Chrysler is also expected to be applied in the restructuring of General Motors.
G.M., which has received $15.4 billion in federal loans, needs to use stock to pay for half of its $20 billion obligation to the U.A.W. Talks are expected to pick up between the company and the union as soon as the Chrysler vote is completed.
Nick Bunkley contributed reporting from Detroit and Zachery Kouwe from New York.
This article has been revised to reflect the following correction:
Correction: April 3, 2009
An earlier version of this story misstated the parties involved in the proposed agreement with the Treasury Department. They were Chrysler's secured creditors, not its unsecured creditors.
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