Reports out of the United States suggest that the US Treasury Department is instructing Chrysler to prepare a Chapter 11 bankruptcy filing for as soon as next week.
The Treasury can make demands due to the massive injection of Federal funds into the struggling Chrysler. A bankruptcy filing by Chrysler would be the first from Detroit's ailing vehicle makers, all of which have been sinking in a morass of debt flowing from increasingly irrelevant and unwanted products tied to a different world of way lower fuel prices and a healthier economy.
The powerful United Automobile Workers has been given assurances that its members' pensions and retiree health care benefits will be protected as a condition of the bankruptcy filing, according to the New York Times.
Italy's Fiat, also struggling with poor sales and debt, seems prepared to complete its planned alliance with Chrysler while the company is under bankruptcy protection.
Unresolved though is what happens to Chrysler's lenders. A New York Times story says the lenders hold US$6.9 billion in company debt but the US government's most recent offer, gives them about 22 cents on the dollar, or US$1.5 billion, plus a 5 per cent equity in a revamped Chrysler. The lenders have been seeking 65 cents in the dollar, or US $4.5 billion, and a 40 per cent stake.
Failure to reach agreement between Washington and Chrysler's uncomfortable lenders could mean the outbreak of an unseemly legal battle in bankruptcy. The New York Times report suggests creditors are adamant their claims are backed by most of the company's collateral, including plants, brands and equipment. But the major senior lenders are expected to argue that they have first claim on those assets, even ahead of the government's debt. We wish them luck on that push.
Last month, the Obama administration said it would provide up to US$6 billion in financing provided Chrysler and Fiat could complete a proposed alliance by the end of April. Fiat was keen as it wants to use the deal as a springboard to get a strong foothold in the US market. Initial negotiations centred on Fiat taking 35 per cent of Chrysler, but the slice was subsequently reduced to 20 per cent.
A bankruptcy case would make it easier for Fiat to select the assets of Chrysler that it wants to hang on to, specifically dealerships, factories and the company's product development operations.
After Fiat's cherry picking is done, Chrysler could flog off any assets it does not want to keep, and cancel existing franchise agreements with superfluous and under performing car dealers.