And so here we are, at another crossroads in the star-crossed history of Chrysler. Today at a noon news conference, President Obama announced that Chrysler would enter Chapter 11 bankruptcy protection today, and would also enter into its much-discussed alliance with Italy’s Fiat SpA.
It’s hard to think of another company that has lurched from boom to bust, back and forth, so many times over the past few decades. Even in my relatively short 34 years, it’s happened a number of times. Bust: Chrysler nearly declared bankruptcy in the late 1970s until Lee Iacocca got federal loan guarantees that saved the company. Boom: The K-car’s success allowed the company to pay back the loans early, and Iacocca’s minivan program was a smash hit in the marketplace, allowing the company to buy AMC to get the coveted Jeep name. Bust: But the company became overly reliant on cars that shared the Reliant’s platform (how’s that for irony?), with most front wheel drive cars, from the K-car to the New Yorker and minivans, sharing a variant of the K’s platform. Boom: Then the company’s products improved, beginning with the Viper sports car, the Eagle Premier-based LH large cars, the Neon, the Ram pickup, and others. During the time in the early- to mid-1990s when Chrysler was finding its styling mojo again, it was also improving production efficiency and was able to capitalize on a booming SUV market with Jeep and Dodge products. Bust: Daimler-Benz acquired the company in an unequal “merger of equals,” gutted the company’s management, and watched Chrysler enter yet another bust period. Boom: Daimler sent Dieter Zetsche to Michigan to serve as Chrysler’s CEO, and on the back of low fuel prices and rear wheel drive performance cars such as the Chrysler 300, Chrysler contributed significantly to DaimlerChrysler’s bottom line while Mercedes-Benz was struggling with quality issues. Bust: Then Chrysler’s gutted, uncompetitive lineup failed to gain traction in the marketplace in an era of high gas prices, which resulted in the company’s sale to private-equity firm Cerberus in 2007, and continuing struggles that take us to today’s bankruptcy filing.
By Brendan Moore
Obama Administration officials are telling reporters that Chrysler is going to file bankruptcy today.
President Obama has a press conference scheduled for 12 noon ET to address Chrysler’s travails.
Chrysler’s creditors and the US Treasury department officials just couldn’t come to an agreement to write down Chrysler’s debt. The holdouts (mostly hedge funds who deal in distressed debt) believe that they can get a return of approximately 65 cents on the dollar if Chrysler goes into bankruptcy liquidation. The federal government and the four major lenders who agree with the government offer have offered those holdout creditors a maximum of 33 cents on the dollar and a small equity position. The four major lenders that hold 70% of Chrysler’s debt are Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley – they decided some time ago that the government’s deal was the best they were going to get.
If Chrysler declares bankruptcy, there is little doubt that a tremendous battle over Chrysler’s assets will commence between the Treasury and Chrysler’s creditors.
Although the smart money might lean towards the government in this struggle, bankruptcy judges have a great deal of latitude in their decisions and probable outcomes sometimes get tossed out the window. There is no certainty to outcomes in complex bankruptcies like this one.
Twelve o’clock is only a half-hour away; we’ll get back to you this afternoon after some of the dust has settled.
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By Brendan Moore
Bloomberg News is reporting that Chrysler will file for Chapter 11 bankruptcy tomorrow morning.
The Wall Street Journal is reporting that Chrysler may file tomorrow morning, but, then again, may not, depending on negotiations still going on as I type this at 11:15 PM ET. The business paper states that President Obama has two speeches prepared for tomorrow morning, one speech if Chrysler files bankruptcy tomorrow, and a different one if they don’t.
The Detroit television stations and major news sites in the city are predicting either a Chapter 11 or a “363” sale (bankruptcy court-ordered auction which has certain legal advantages to distressed companies) to Fiat as a whole entity.
Members of the US Treasury department say they are confident that the Fiat-Chrysler alliance can be consummated no matter what happens.
The uncertainty regarding a Chapter 11 filing revolves around Chrysler’s lenders and their refusal so far to accept Treasury terms to settle their loans to Chrysler for some percentage of the amount outstanding. The four largest lenders that hold 70% of Chrysler’s debt, which are all banks, have agreed to Treasury terms, but there are some smaller banks holding out. In addition, almost all of the hedge fund creditors remain unconvinced that Treasury terms are better than what they could realize in bankruptcy court. Therefore, the negotiations continue into the night.
Whatever happens with Chrysler is very likely to happen with GM right afterward.
Nobody is quite sure where that will leave Ford, by far the most healthy of the Detroit Three at this juncture, and the domestic auto company NOT in danger of filing Chapter 11, but apparently that is a problem for another day. However, there is no doubt that a Chapter 11 filing by Chrysler or GM, or both, would put Ford in at least a temporary disadvantage in terms of costs, debt servicing, etc. Of course, the decline in consumer confidence in GM and Chrysler may just about even things out.
It is believed that most consumers will run as fast as they can from a bankrupt auto company, as has happened in the past. But, history may not be the best example in this day and age. Perhaps the debilitating effect on sales may not be as bad as the predictions.
It looks as if we will know more about a potential bankruptcy sometime in the next 12 hours.
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By Chris Haak
I really don’t enjoy writing about bad news. I’d much rather rave about how the exhaust note of a Corvette at full bore made the hair on my arms stand on end, or how passers-by waved and gave me the thumbs-up as I rumbled by in a Dodge Challenger SRT8. I also pains me to chronicle the end of General Motors as we know it. I grew up in pretty much an all-GM household. When I was born three [and a half] decades ago, my father’s job was selling new Chevrolets and Cadillacs. My first ten or so cars (the count is difficult to keep, since my father is now self-employed in the car business and the line between “my car” and “a car in inventory that I drove for a while” was pretty blurry at times) were all GM vehicles. Then, the first three new cars that my wife and I bought were, in order, a Honda, a Nissan, and a Toyota. Last summer I came back to the GM fold for my own car, a 2008 Cadillac CTS. Bottom line: I’ve always held a soft spot in my heart for this company, in spite of some of the absolutely dreadful products that they’ve sold to the public over the years. But why would I?
GM is already just a shell of its former self. The company is already very much under the control of the federal government, as evidenced by the way the government showed the door to former CEO Rick Wagoner, and more recently, by the way GM’s latest debt offering proposed giving the government a 50% stake in the company in return for forgiving $10 billion in loans, but giving bondholders a measly 10% stake in return for forgiving about $24 billion in debt. That last part is what has bondholders up in arms; they rightfully feel that they are being treated unfairly, and are quite unlikely to accept the terms of GM’s debt-for-equity exchange offer by the deadline at 11:59 EST on May 26, 2009. The US Treasury (of course) will have the final say, but GM believes that ninety percent of outstanding debt by value will have to be tendered for the offer to be considered a success. That is extremely unlikely to happen.
By Chris Haak
As David Wright pointed out yesterday in his piece on the Honda Fit vs. the Honda Civic, we do not commute to work or run errands on paper – we do so in cars made of metal, plastic, rubber, and glass. What sounds like a good idea on the spec sheet sometimes just isn’t the same thing when the proverbial rubber meets the road. Today’s example: the continuously variable transmission, or CVT.
For those who are unfamiliar with CVTs, they are generally an automatic transmission that features an infinite number of gear ratios rather than, say, five or six fixed ratios as on a conventional transmission. Once you shift a CVT into drive, its computer determines the optimal operating range based on the engine’s power characteristics, throttle application, engine load, and other factors. The transmission continuously varies its gear ratio during vehicle operation, usually by changing the distance between two V-shaped pulleys. As this distance changes, the belt connecting them rides higher on one pulley and lower on another pulley, changing the effective diameter of each pulley and therefore altering the gear ratio.
On paper, the advantages of a CVT are numerous. As a conventional automatic spools up during acceleration from one beginning of one gear ratio to immediately before it shifts, the engine will find itself out of its peak powerband immediately following a shift. A CVT can get the engine to its peak power-producing speed and just stay there, altering the ratio so that the engine never runs out of revs. This theoretically improves acceleration. Further, the ability to keep the engine at its peak operating speed also allows the CVT to keep the engine at its most efficient ratio when cruising at a steady state, which improves fuel economy and emissions. Some higher-end cars with CVTs, such as Nissan’s offerings, even allow a set number of pre-programmed fixed ratios that can emulate a conventional automatic transmission. When coupled with shift paddles, these CVTs with a manual feature offer lightning-fast shifts and, at least theoretically, the best of both worlds.