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Steane Klose | May 1, 2009

Chrysler LLC has filed for Chapter 11 bankruptcy overnight and at the same time announced what is being referred to as an ‘industry-changing’ deal with Fiat.

Chrysler has spent weeks negotiating with its lenders in an attempt to avoid bankruptcy, but has failed to gain the support needed.

This is the best result given Chrysler's huge restructuring problems and debt position. Chapter 11 is an 'orderly' bankruptcy. It provides Chrysler with the needed moratorium from its debt and pension plan obligations, allowing it to restructure and (many will be hoping) trade its way out of trouble. That latter objective won't be easily achieved however.

obama-gm-chrysler

While the move has received the support of President Obama, who described it as being a critical step in saving Chrysler and 30,000 jobs, there will however be further pain ahead. Expect announcements of shedding of the worst performing brands and models under the Chrysler umbrella, and further plant closures in the period ahead.

The filing for Chapter 11 is also evidence that President Obama has no intention of further propping up of American automakers and giving in to the demands of their lenders. This may not bode well for GM.

In fact, President Obama appears to have little time for the investors who refused to continue supporting Chrysler;

"I don't stand with them. I stand with Chrysler's employees and their families and communities," the President said.

"I don't stand with those who held out when everybody else is making sacrifices. That's why I'm supporting Chrysler's plans to use our bankruptcy laws to clear away its remaining obligations."

For Chrysler, the Chapter 11 process will include up to $US 3.5 billion in debtor-in-possession financing and up to $US4.5 billion in exit financing.

Chrysler Chief Executive Robert Nardelli will leave Chrysler following its emergence from bankruptcy and the US Government will place six members on the new company's board, in addition to three appointed by Fiat.

In the meantime, Chrysler Financial will cease the provision of finance for new cars and trucks, with GMAC (GM’s financing arm) stepping in to provide finance to Chrysler dealers and their customers.

It is expected that there will be closures amongst Chrysler’s 3,600 strong dealer network.

chrysler-fiat

Chrysler’s newly inked alliance with Fiat SpA has seen it sell a 20 percent stake to Fiat that can be increased to a majority shareholding, once the government loans to Chrysler are repaid.

While details regarding the alliance are scarce, it is expected to greatly assist Chrysler in developing a range of more fuel efficient, greener vehicles.

"It's a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry," Mr Obama said.

"Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry."

Interestingly, President Obama has indicated that he hopes the entire Chapter 11 process will take only 30 to 60 days.

GM will be next to face the music, with an end of May deadline looming for a restructure of its operations and an American President who has little respect left for the men in suits.

[via Reuters]

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