IHS Global Insight Perspective | |
Significance | Bankrupt automaker Chrysler has filed several motions in a New York bankruptcy court as it begins its journey through Chapter 11. Among other things, it is looking to sell significant assets to Fiat, close down eight component and assembly plants, and begin using US$4.5 billion in government money. |
Implications | The company hopes to make significant use of Section 363 of the Bankruptcy Code, which will enable it to sell specific assets free and clear of liens at a special auction process. |
Outlook | Given that no other automaker has expressed any interest in Chrysler assets (despite nearly a year of trying by Chrysler executives), the initial process is expected to go smoothly—but contentious fights may surface when attention turns to the dealer body. |
Chrysler began its rapid-fire bankruptcy process at a New York bankruptcy court last Friday (1 May), filing additional motions over the weekend to get the restructuring process under way. Many major developments regarding the case have already been announced, as Chrysler is expected to file several motions in court with Judge Arthur Gonzalez. The company has announced its plans for the initial stages of bankruptcy, over the next week:
- Chrysler to Sell Most Assets to Fiat: The sale of assets is a two-part process, with the first part being the receipt of competing bids. None are expected as court documents show that Chrysler has tried over the last year to portion and sell its operations, plants, and brands in various combinations to nearly every major automaker in the world, with no success. The second part of this process will see these assets go into a "new Chrysler", which would be owned by the company's United Auto Workers (UAW) union employees, Fiat, and the U.S. and Canadian governments. Chrysler has already filed a motion to perform the first part of this process; Judge Gonzalez will have to decide whether or not to allow it. There may be objections from the company's creditors, who have the right to file a counter-argument to block the sale.
- Eight Plants to Remain Behind: While all of the company's brands, employee contracts, and most of its plants will be considered part of the "good" assets, Chrysler announced that eight assembly and component plants will remain behind with the "old" Chrysler for eventual liquidation or closure. The facilities on the list include three component plants: Detroit Axle, Twinsburg Stamping in Ohio, and Kenosha Engine in Wisconsin. Five are assembly plants: St Louis (Missouri) South, Newark (Delaware), Sterling Heights (Michigan), Conner Avenue (in Detroit), and St. Louis North.
- US$4.5 bil. Ready for Use: Chrysler will file a motion to begin using US$4.5 billion in debtor-in-possession (DIP) financing that has been made available by the U.S. Treasury; the government has now committed up to US$8 billion in additional loans on top of the US$4 billion that the company has already received.
- Critical Suppliers to Be Paid: The company has already filed a motion asking for approval for it to continue paying a list of critical suppliers, in order to keep them afloat and potentially stave off a wave of supplier failures that could affect the entire industry. The company owes its suppliers nearly US$1.6 billion, and many suppliers elected to stop shipments to Chrysler on Thursday and Friday last week (30 April and 1 May) despite the announcement that the company would not stop production until this week. Chrysler has also asked to be allowed to remain in the federal Supplier Support Program, which provides receivable insurance to suppliers.
Outlook and Implications
There are set to be a number of developments during the first week of Chrysler's bankruptcy, and these developments are likely to set the tone for just how successful the company will be in its attempt to enter and exit Chapter 11 in a matter of weeks, instead of the typical several-month process. One of the keys to ensuring that this happens will be "Section 363" of the Bankruptcy Code, which the company intends to make liberal use of in its restructuring and reformation process. The main feature of Section 363 is the ability to quickly sell a company's assets using an expedited process, which in many cases allows the buyers to acquire the assets free and clear of any liens. The quickest way to do this is to negotiate a sale ahead of time, and then use bankruptcy as the vehicle to follow through with the process. A secret auction is set up, with one "stalking horse" bidder used as a baseline for the proceedings. At the end of the day, the highest bidder wins the various assets; Chrysler has already been negotiating with Fiat for months, and given that the company has tried in vain to sell its assets to various other organisations without any luck at all, it seems likely that there will be no challenge to the Section 363 sales to the Italian automaker.
The goal then will be to get the "new Chrysler" formed, finalised, and up and running within the next few weeks. Once it is in place, barring substantial court fights from various creditors or stakeholders, that new company will have Chrysler's "good" assets without the crushing debt of the old organisation. That is the organisation that the company's management wants to get out of bankruptcy as fast as possible, and to restart plants so as to begin building vehicles again. The remaining unwanted assets can linger in bankruptcy court for quite a while longer, with the goal of liquidation to pay off creditors. This may sound fairly easy, but it is likely to be a much more complicated process than either the government or Chrysler and Fiat executives have made it out to be. Once in bankruptcy court, the ability of creditors and stakeholders to be legally heard is paramount; the company cannot just dismiss unwanted assets or change contracts—there must first be good-faith negotiations between the parties to come to a settlement. This is where the dealer issue is likely to be very contentious, as the company has already said that it intends to eliminate an undisclosed number of dealers from its 3,300-strong roster. In order to do this in bankruptcy court, good-faith negotiations to come to a settlement must occur between Chrysler and the dealer body. If no resolution can be reached, only then can Chrysler file for a motion to dismiss its franchise contracts. Much work is still to be done for the automaker in bankruptcy, but slowly a plan is becoming clear as to how the company intends to proceed.