Chrysler, Fiat agree framework for deal

Videos
Photos

(China Daily)
Updated: 2009-04-01 08:08

Fiat and Chrysler have a framework for an alliance and a US government blessing and now must race to tie up crucial agreements with debt holders and unions to make it a reality.

Nothing less than Chrysler's future is at stake, with a targeted bankruptcy for the No 3 US automaker a clear risk after a 30-day deadline for new federal funding has passed.

One possible bankruptcy scenario being discussed would have Chrysler's "good" assets sold off to Fiat, a person familiar with the discussions said on Monday.

US President Barack Obama said on Monday that the government would give Chrysler 30 days to complete a tie-up with Fiat and would consider investing $6 billion if a deal could be reached.

Chrysler and Fiat announced a proposed partnership in January that would open the North American market to the Italian automaker and give US automaker Chrysler access to small car technology to help it survive.

But operating under $4 billion of government loans and seeking more, Chrysler was told by the US auto task force that restructuring on a stand-alone basis was unrealistic.

"It is sort of a warning shot," Commerzbank analyst Gregor Clausen said, adding that the US government wanted to get the most out of the automakers and other stakeholders to make a turnaround successful.

The government backing of the alliance came after Fiat agreed to reduce its initial stake in Chrysler from 35 percent stake to as low as 20 percent, according to a person familiar with plans who requested anonymity because the terms of the agreement have not been finalized.

Fiat's stake in Chrysler would increase as it begins to make investments in the partnership, the person said.

Fiat has not been required to contribute cash or assume debt to partner with Chrysler, but the US automaker has said the contributions of small car technology and other benefits would be worth up to $10 billion to Chrysler.

It also has agreed to repay US taxpayers before Fiat could take majority control of Chrysler, officials said. The earlier plan had no such bar to Fiat raising its stake.

Fiat's acceptance of a smaller-than-expected initial stake has heightened expectations the proposed alliance with Chrysler will end up costing Fiat money.

Fiat investors worry that Fiat could agree to take on some Chrysler debt or agree to participate in a capital raise if the US car maker ever comes to need one.

"I think the Fiat deal makes sense," said Brad Coulter, a restructuring adviser at O'Keefe & Associates in Detroit. "I don't know what liabilities Chrysler brings with it that may scare them off."

Significant hurdles

The task force wants Chrysler, Fiat and the United Auto Workers to reach deeper concessions than outlined in Chrysler's original emergency government loans and for Chrysler to rework its balance sheet, all in the next month.

Should Chrysler's efforts succeed, the US administration would consider $6 billion of additional investment.

Chrysler has a $6.8 billion first-lien debt with banks led by JP Morgan. It also has $1.5 billion of second lien debt held by Daimler AG and $500 million of second lien debt held by Cerberus Capital Management, which control 19.9 and 80.1 percent of Chrysler respectively.

"We believe that is way beyond, way beyond, what Chrysler can sustain," said a senior administration official who asked not to be named in discussing details of the panel's closed-door deliberations.

Cerberus has offered to give up all of its equity in Chrysler, which has been written down. Officials also indicate that Cerberus faces pressure to give up a claim to the second lien term loan, which it had proposed to convert to equity.

Fiat Chief Executive Sergio Marchionne had said at a news conference on Friday that final terms of the partnership would end up being dictated by the US authorities. He said Monday that talks with the auto task force had been "tough but fair".

Analysts said Fiat likely would have to spend some money on Chrysler, with bankers or bondholders eventually seeking some sort of guarantees from the healthier of the two, Fiat.

That is a worrying prospect for Fiat investors because the Italian automaker has already seen its debt rating cut to junk on concern about its deteriorating financial position.

Reuters

(China Daily 04/01/2009 page16)