April 30, 2009 — -- Lee Iacocca, who brought back Chrysler from brink in the 1980s, said that today's bankruptcy filing marks a "sad day" for him.
"It pains me to see my old company, which has meant so much to America, on the ropes," Iacocca said in an e-mail statement to ABC News. "But Chrysler has been in trouble before, and we got through it, and I believe they can do it again."
Iacocca, who served as CEO from 1978 to 1992, said if the company is smart they will bring together a consortium of workers, plant managers and dealers to come up with real solutions.
"These are the folks on the front lines, and they're the key to survival. Let's face it, if your car breaks down, you're not going to take it to the White House to get fixed," he said. "Every day I talk to dealers and managers, who are passionate and full of ideas. No one wants Chrysler to survive more than they do. So I'd say to the Obama administration, don't leave them out."
President Obama said today that Chrysler's decision to head into bankruptcy will help give the car company "a new lease on life." But Obama also attacked a group of hedge funds for holding out for more money while everybody else involved in trying to save the company was making sacrifices.
The president called the nation's third-largest automaker "an icon of America's auto industry and source of pride for generations of American workers," but he said that it has been "weakened by papering over tough problems and avoiding hard choices."
"For too long, Chrysler moved too slowly to adopt to the future, designing and building cars that were less popular, less reliable and less fuel efficient than foreign competitors," Obama said.
The president praised autoworker unions, management, dealers and group of lenders led by JPMorgan Chase for making major concessions. But, he said, a group of investment firms and hedge firms held out "for the prospect of an unjustified taxpayer-funded bailout."
That is the principal reason why -- despite everybody else's sacrifices -- Chrysler must now seek Chapter 11 protection.
"Some demanded twice the return that other lenders were getting. I don't stand with them," Obama said of the hedge funds. "I stand with Chrysler's employees and their families and communities. I stand with Chrysler's management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler's cars."
Chrysler CEO Bob Nardelli says he will "leave the company following the emergence of the new company from Chapter 11 and the completion of the alliance with Fiat."
To help it compete, Chrysler announced today that it had reached "an agreement in principal" to partner with Italian automaker Fiat, which will share technology needed to help make more fuel-efficient cars.
The United Autoworkers health care plan, called the VEBA -- the Voluntary Employee Beneficiary Association -- will own 55 percent of the company, the U.S. and Canadian governments will own proportionate shares of a 10 percent stake and Fiat will initially hold a 20 percent ownership stake in Chrysler. Fiat can increase its ownership by an additional 15 percent. But Fiat cannot become a majority owner until after all U.S. government loans have been completely repaid.
The administration expects the bankruptcy to be short -- 30 to 60 days -- and will be filed "immediately" in a New York court.
While the president may hope for a short bankruptcy, it may not be that simple, especially with those creditors that Obama signaled out for not cooperating.
"As long as there is significant dissent, there is uncertainty in the outcome," said Barry Adler, NYU law professor.
While the plan calls for using Section 363 of the bankruptcy code "to clear away the remaining impediments to its successful relaunch," a lot will depend on whether or not the individual creditors have a case to make before the bankruptcy judge that has to be considered before this section of the code can be used.
A Fast Bankruptcy?
It's not that a fast bankruptcy won't happen. It might, but it's not necessarily a done deal.
Ed Morrison, a professor at Columbia who specializes in bankruptcy, pulled statistics from well-known bankruptcy expert Lynn LoPucki's Web site that tracks filings and found that from 2000 to the present, the length of the median "pre-negotiated" bankruptcy case was about 5.3 months. During the same period, the length of the median "prepack" case was about 52 days, according to the same data source.
"Prepackaged" means that the debtor drafted the plan and successfully solicited votes on it before filing the case. Prepackaged cases nearly always are filed solely to modify the company's liability on an issue of junk bonds. Once filed, these cases move very quickly.
"Prenegotiated" means that the debtor negotiated the terms of the plan with some, but not all creditor groups before filing -- even if no prefiling vote was taken on the plan. An example would be a plan to sell the debtor's business, which has been drafted and negotiated with a large secured creditor before filing, but not with trade creditors.
"I just hope and pray that something will definitely turn around in another way, but that's all you can do at this point," said Renee Smith, a Chrysler worker.
Co-worker Brenda Bauman added, "Well, my dad is a retiree, so I'm more worried about him right now than me because I can always go out and find a job, somewhere."
Another employee, Paul Thayer, said he wishes the union did more.
"They should have thought this out a little further than the way they did this and I really don't like that they screwed over the retirees -- these people worked for 30 years and now we are just casting them to the side?" he said. "Leaves a real sour taste in my mouth."
The U.S. government is prepared to provide approximately $3.3 billion in debt or in possession financing to support Chrysler though an expedited bankruptcy proceeding.
When the new Chrysler emerges from bankruptcy, the government is prepared to loan about $4.7 billion to it with $2.1 billion due in 30 months. Half of the remaining balance would be due on the seventh anniversary of bankruptcy emergence. The rest would be due a year later. The interest will be an appropriate combination of cash and payment-in-kind. There is also an additional note of $288 million which is a fee for making these loans. These loans will be secured by a first priority lien on all of Chrysler's assets.
Chrysler's New Future
The U.S. Treasury will receive 8 percent of the equity of the new Chrysler. Treasury can select four independent directors initially but after that will play no role in governance or management of the company.
The financing for this new Chrysler will come from GMAC which will get financial support from the U.S. government in order to expand their portfolio to include Chrysler.
Chrysler is also getting a big boost from north of the border: Canada will contribute one dollar for every three dollars the U.S. government contributes.
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 on each dollar held. That left Chrysler's fate in the hands of about 40 hedge funds, with about 30 percent of the debt.
The administration tried to sweeten the pot Wednesday, adding $250 million to the $2 billion that the banks had settled for.
Daimler, Chrysler's current minority shareholder, has agreed to waive its share of Chrysler's $2 billion of second lien debt, give up its 19 percent equity interest in Chrysler's ultimate parent and pay $600 million to Chrysler's pension funds.
Chrysler had a shortfall of $9 billion in its pension plan as of the end of November 2008. If the company were to turn over the pension plan to the Pension Benefit Guarantee Corporation, it would only kick in $2 billion to make up the difference. More important, pensioners could see big drops in how much they receive.
But that's not happening.
"The plans remain ongoing under the sponsorship of Chrysler, and are insured by the Pension Benefit Guaranty Corporation," said Acting Director Vince Snowbarger. "As the bankruptcy process unfolds, the PBGC will work with Chrysler, its unions, and all other stakeholders to ensure continuation of the pension plans."
The administration also said there will be no layoffs associated with the bankruptcy. Although dealerships will eventually take a hit and will be closed over time, but it is unclear at this point exactly how many. The company will be able to operate normally during the bankruptcy process. Americans will be able to buy Chrysler cars and warranties will be honored.
The president's auto task force rejected Chrysler's restructuring plan in March and gave the automaker more time to make another effort, including a tie-up with Fiat. The company has borrowed $4 billion from the government and needs billions more to keep operating.
In a letter to employees today, Nardelli said, "Thank you again for your tireless efforts during this extraordinary time, and your dedication to ensuring Chrysler's future success."