Saturday, April 4, 2009

Chysler and Fiat Alliance: Why the deal WILL NOT Happen Within Obama Administration Timeline

Fiat Group SpA has been trying to get a big piece of Chrysler for next to no money, by exchanging its intellectual property for 35% of the company while the American taxpayers are on the hook for $7 billion to make the partnership happen. The Chrysler - Fiat deal most likely will not go through within the Obama administration's time-line due to the real-world nature of business. Despite the fact the Chrysler is broke, the debt holders may want to seize the collateral rather than keep Chrysler on life support while watching shares be diluted from a 35% ownership stake converted to Fiat. This means Chrysler is going to take a trip to bankruptcy court with or without Fiat and regardless of what government bureacrats, President Obama, and Congress think about standard business practices, which includes bankruptcy court.

On Friday the Wall Street Journal reported Chysler LLC's lenders are resisting efforts to convert most of the automaker's debt to equity, a conversion key to Chrysler's plan to restructure without filing for bankruptcy protection, according to published reports.

Banks including JPMorgan Chase & Co., Goldman Sachs, Citigroup Inc. and Morgan Stanley loaned Chrysler $6.8 billion in 2007 when Crberus Capital Management LP acquired 80% of the automaker

Now, Chrysler needs to swap $5 billion of that debt for equity in the automaker, as part of the plan for the company to become viable.

The banks' reluctance is slowing Chrysler's efforts to reach a definitive deal on an alliance with Fiat Group SpA, and also stalling the company's attempt to reach a health care agreement with the United Auto Workers union, the Journal reported.

A Citigroup spokeswoman declined to comment to The Associated Press. Messages seeking comment were left for the other banks. It is clear the debt has no interest in converting to equity when the equity is on the hook for billions in unfunded liabilities that makes a trip to the bankruptcy court all but guaranteed at sometime in the future, unless the entire company is turned over to the Federal Government for trusteeship of the unfunding liabilities, which is not out of the range of possibilites after what the Obama Administration has shown to be its proclivity toward bailingout big banks and private equity at 100 cents on the dollar invested rather than let the markets and bankruptcy court do its work.

Chrysler released a statement saying it "is committed to working closely with all constituents, the administration, U.S. Treasury and the (government's auto) task force over the next 30 days to reach a successful conclusion." The company declined further comment.

Treasury officials couldn't be reached for comment.

Because the banks hold debt secured by collateral, they have the right to take Chrysler plants and assets if the company files for bankruptcy protection. That means the banks may be better off with what's left of Chrysler in liquidation than what they'd get if they agree to restructure the debt.

The government has little leverage to force the banks to make concessions if they believe they'll be better off in bankruptcy court. But the banks that are pushing back against Chrysler and the government are also the direct recipients of government aid through the banks' own bailouts.

Chrysler also owes money to Cerberus and Daimler AG, but they already have agreed to exchange all that debt for Chrysler equity. Other lenders also appear willing to make concessions, but JPMorgan is leading the negotiations with Treasury, the Journal reported.

It is easy to figure out why Fiat wants its 35% in exchange for green-car technology know-how. The company has said it wants a production base in North America to build its Alfa Romeo, and probably Fiat cars, although most likely wrapped in Chysler's skin and brand. A quarter-century ago, Fiat quit selling the Fiat brand in the United States; today it sells just a few thousand Ferrari and Maserati cars in America.

Fiat is presented with a huge opportunity to reenter the United States market and benefit from the US government's and taxpayer's current largess, but obviously Fiat cannot buy Chrysler or take on its tremendous unfunded liabilities in its pensions due not only labor but previous management. Fiat does not want to tie itself to titantic Chrysler. The company said it "intends to make absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness to Chrysler."

Fiat CEO Sergio Marchione has said that in order to survive, a car-maker needs to sell between 5.5 to 6 million units per year. But Fiat and Chrysler are still well below this level by more than 2 million units. It is not out of question that in 5 or 6 years, maybe a decade, car sales do takeoff and this partnership may sell 8+ million units in the United States, and then the two partners and the private equity would be rolling in the money.

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