Chrysler Settles … Sort Of
I reported last week that there was a fist fight going on between Chrysler’s bondholders and the government. Back then – doesn’t it seem ages ago? – the creditors were holding out for more than the paltry $1.1 billion that the government wanted to give them. This is a long way down from the $6.9 billion in debt that they now hold.
Today it appears that four of the largest creditors have agreed to a deal that gives them about $2 billion in cash. Those four all happen to be banks who are part of the TARP program: Citi; JP Morgan Chase; Morgan Stanley and Goldman Sachs. When they rejected the original government offer I lambasted them as ingrates, so now I give them due credit for coming around and understanding the political reality they find themselves in. Taking this revised offer makes sense and it takes them all off the hot seat as Chrysler continues to press for a durable solution. It also appears that there is now a deal in place to force the remaining smaller banks and hedge funds who hold the rest of the debt to cave in and accept similar terms.
At the same time the news emerging from Chrysler indicates they have settled their negotiations with the UAW. When the dust clears the UAW, and the separate employee health care trust set up to administer ‘legacy health care costs’ will stand as major shareholders. Fiat will end up with a 35% stake and the US government will probably also own a large chunk as well. In fact at the end of the day the combined US government and UAW stakes will represent majority ownership of the company.
Such is life in the US auto industry: just yesterday GM published a proposal that would have left the UAW and the Government owning well over half its shares too. The future of the GM deal remains cloudy however since it relies on the conversion of most of its debt into equity with the creditors ending up with about 10% of the new company’s stock. I doubt whether that conversion will go smoothly. Having read it more closely I see that it requires 90% of the debt holders to agree to the deal. That’s a tall order: there are always cantankerous creditors who think they can squeeze more from the company. Brinkmanship is the name of the game for some of these folks. So look for the GM story to have quite a twist in its tail.
In any case the government is pulling out all the stops to get resolution. Both companies could still head towards more formal bankruptcy. But the most likely ending has both reorganized and severely shrunk within the next few weeks.
No one said fixing the auto industry would be easy!
