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Tony O'Kane | Apr 30, 2009

Word on the wire is that US President Barack Obama will announce that Chrysler LLC will be placed into Chapter 11 bankruptcy, a move which will enable Chrysler to continue operations while temporarily relieving it of its substantial debt obligations.

Chapter 11 bankruptcy protection has been a likely option for some time now, and, perhaps strangely, would likely assist in facilitating an alliance between Chrysler and Italian automaking conglomerate Fiat. After yesterday's announcement that Daimler will transfer its 19.9 percent share back to Chrysler completely gratis, things now appear to moving to the end-game for the embattled manufacturer.

A Chrysler under Chapter 11 is a far more attractive investment proposition for Fiat than a Chrysler that's at the mercy of its creditors.

Not all of Chrysler's lenders are sympathetic to its plight, but with Chapter 11 protection providing a moratorium on the company's debt and pension plan obligations, Chrysler will be free to concentrate on building and selling cars - and hopefully working its way back in the black.

Chrysler isn't in the clear just yet, however. If the automaker to qualify for a further US$6 billion in Federal loans, Chrysler and Fiat must nut out a partnership agreement before the April 30 deadline, which expires at 11:59PM Eastern Daylight Time in the US.

Another unresolved issue for Chrysler is whether its 46 creditors will be willing to accept a US$2.25 billion cash payment in exchange for wiping out the automaker's US$6.9 billion secured debt. Most have agreed to the idea (which may make filing for bankruptcy unnecessary) but three major lenders have so far refused to accept the offer, effectively stalling the plan.

Chrysler LLC is in a real state of flux at the moment; indicators now point to the company filing for Chapter 11. With an announcement expected from the US Government any time now, we should have all the answers we need real soon. Stay tuned.

[Bloomberg]

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