The US Treasury department has arrived at an agreement with the United Automobile Workers union, whose members’ pensions and retiree health benefits would be protected as one of the conditions of this bankruptcy filing.  In addition, the Fiat car company of Italy would undertake to form some kind of alliance with Chrysler while the company seeks bankruptcy protection.  The Pensions and health benefits of the auto workers would be protected as a condition of the Chapter 11 filing, according to an "agreement in principle" between the US Treasury and the United Automobile Workers, according to a NY Times story.

According to the Times the only major question remaining unresolved is what would happen to the Chrysler bond holders.  The debt holders currently have about seven billion in Chrysler debt.  Negotiating on behalf of the beleaguered company, the government’s most recent offer would entitle the company’s bondholders and banks about 22 cents on the dollar for their holdings, or about $1.5 billion, along with and a 5% equity stake (stock) in a newly reorganized Chrysler.  A steering committee of the lenders proposed that they receive 65 cents on the dollar, or about $4.5 billion, and a 40 percent equity stake.  This is not likely to happen now.

David Cole, the chairman of the Center for Automotive Research, speculated that the bankruptcy threat could actually improve the prospects for the Chrysler-Fiat deal.

"The higher the level of threat of bankruptcy, the better chance of a deal to avoid bankruptcy," Cole said.

If the Treasury doesn't reach a deal with Chrysler's lenders, things could go very bad in bankruptcy court very quickly.  Chrysler put up its factories, brands, equipment and intangible assets as collateral for those loans and its lenders may be able to lay claim to them before Fiat or Chrysler can, further complicating the deal.  When an organization fails to meet a normally scheduled debt payment bankruptcy is triggered and according to law the bondholders can if they wish force the company into filing for bankruptcy in an attempt to garner more value than offered by the Treasury scheme.

The way this arranged alliance with Fiat would work is as follows:  Fiat, assuming that no deal could be reached out of court, would complete a merger with Chrysler while its under bankruptcy protection.  Bankruptcy would then allow Chrysler to dump any assets it doesn't want and also nullify franchise agreements and other contractual obligations that help it to reduce its dealer population and costs while Fiat, would take advantage of Section 363 of the federal bankruptcy code to cherry pick which Chrysler assets it wanted to hold onto, such as dealers and factories. Chrysler would then emerge from bankruptcy protection joined with Fiat, the UAW, the Treasury Department and its lenders as the new owners!

In related news, General Motors Corp. is expected to announce this week that it is cutting about 170,000 vehicles from its planned production by closing factories for as long as nine weeks starting this summer.  This news comes as the automaker labors on its restructuring plan it needs to produce before a June 1 government deadline.

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This article was written by J. Mark Soveign who owns and writes
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