Statement on the Chrysler Bankruptcy

• Chrysler will file for Chapter 11 protection, meaning that this will be a debtor-in-possession restructuring, and not a Chapter 7 liquidation with an appointed trustee at the helm. The U.S. government is set to provide adequate debtor-in-possession (DIP) financing for the duration of the bankruptcy.
• Fiat has agreed in principle to an alliance with Chrysler and will take a 20% ownership stake in the company, with the eventual goal of having a 35% stake in the new company, which will be formed using the bankruptcy process. Chrysler assets will then be "sold" to the new company and stock issued for that organization.
• The United Auto Workers will become the majority shareholder in the new company, acquiring a 55% stake in the new organization thanks to a major debt-to-equity swap to help pay for the union's retirement healthcare trust fund.
• Sales of Chrysler vehicles will continue during this time, as the government provides additional DIP financing in order to allow Chrysler to hopefully execute a quick restructuring and exit bankruptcy in 30–60 days time. The government will also use its warranty program to guarantee Chrysler vehicle warrantees as a backstop to boost consumer confidence for Chrysler vehicle purchase intenders.
• Production of Chrysler vehicles however, will not continue during this period. Beginning Monday (4 May), Chrysler will cease production at most of its assembly facilities, and will not resume production until the company emerges from bankruptcy in 30–60 days time, according to a statement released by the automaker.
• CEO Bob Nardelli will step down from his position upon completion of the bankruptcy effort, returning to Cerberus Capital Management as an advisor.
• GMAC will take over the financing of retail and wholesale operations for Chrysler, and will receive unspecified additional funds from the U.S. government to do so. There was no word on the fate of Chrysler Financial, but given that it has not been granted bank holding company status, it is likely to be closed down.

This is basically going to be a pre-packaged bankruptcy, as many of the major stakeholders have already come to the table with concessions and agreements that are not likely to face serious modification in bankruptcy court. A few questions still remain, however, such as whether or not the bondholders that held out for bankruptcy will recover any of their investments, whether or not the 3,300 Chrysler dealers will be targeted for franchise cancellation, and whether or not Chrysler will transfer its underfunded pension obligations to the Pension Benefit Guaranty Corporation. Given that Chrysler already has agreements in place and new ratified contracts with the United Auto Workers and Canadian Auto Workers unions, it seems unlikely that this would occur, as bankruptcy courts like to see settlements with unions instead of abandonment of obligations. Adhering to the already-negotiated settlements will also speed the bankruptcy along, and not make another legally contentious foe out of the unions, in addition to what is sure to be a fight from dealers and minority bondholders. Supplier contracts could also face revision and elimination under bankruptcy, however, leading to additional concern about the health and safety of the supply base for the rest of the American industry; only time will tell if this constituent group is set to be targeted by Chrysler in court.

In short, while bankruptcy has become the result of the ongoing struggle for Chrysler to right its listing ship, this is not the devastating uncontrolled shutdown and liquidation of the company that could have resulted if none of the parties had already made concessions, or if Fiat was not expected to sign a partnership agreement by later today. The success of the bankruptcy will depend on how quickly Chrysler can execute it, and then exit it as soon as possible. But questions remain about Chrysler's short-term viability, and what bankruptcy itself will do to Chrysler's sales, which were already down more than 40% in the first quarter of 2009. This could further undermine Chrysler sales, which could mean a lift for domestic competitor Ford, in particular. This may be the primary reason that Chrysler has shuttered its production for the duration of the bankruptcy, a highly unexpected move that has many people wondering about the ability of its suppliers to survive. It is also a big risk in assuming that the bankruptcy will indeed take no more than 30–60 days; if a contentious court fight emerges, the bankruptcy could drag on for much longer than this.

IHS Global Insight anticipates minimal changes to its total industry light-vehicle sales forecast of 9.5-million units during 2009 as a result of this announcement, although we will be lowering Chrysler's market share and raising Ford's for this year. Similarly, while the overall total production forecast will not be lowered significantly, we will be shifting shares of production, likely increasing Ford production, in particular; and reflecting the plant announcements from Chrysler, by lowering production for the company. With the impending GM announcement at the end of May, we will not be making sweeping changes to GM at this time. Please check back frequently for any further updates, and for our Light-Vehicle Sales Summary this Friday evening after the sales results calls.