Updated from 2:53 p.m. EDTChrysler filed for Chapter 11 bankruptcy protection in a New York court on Thursday, a move President Barack Obama said was necessary because a small group of investors and hedge funds would not go along with a deal to save the iconic automaker. Obama said the small group was "hoping that everybody else would make sacrifices and they would have to make none. Some demanded twice the returns that other investors were getting. "I don't stand with them," he said. Late Thursday, one of the creditors changed its mind and agreed to go along with the deal. Obama's statement seemed likely to increase pressure on General Motors ( GM) bondholders who have been unwilling to go along with the deal the troubled automaker is proposing. GM faces a June 1 deadline to get agreements from debt holders or faces bankruptcy itself. However, a spokesman for the Ad Hoc Committee of General Motors Bondholders, which holds about 20% of GM's $27 billion in unsecured debt, said Thursday the cases have little in common. The committee "views these as two entirely separate cases," said Nevin Reilly. "Chrysler has a unique set of circumstances." In a prepared statement, the ad hoc committee said it supports a plan to allocate GM equity on a pro rata basis to the retiree health care trust fund and to bondholders. The bondholders would then own 58% of GM. The Voluntary Employee Beneficiary Association retiree health care trust administered by the United Auto Workers owns 41%. Current shareholders would own 1% and the federal government would not be involved in ownership, instead retaining its $20 billion in loans.
"We do not believe that nationalizing one of America's largest and most important companies is the right policy decision for our country," said Eric Siegert, financial adviser to the ad hoc committee, in a prepared statement. Committee representatives were meeting with Treasury officials Thursday. Among the dramatic moves associated with the Chrysler deal, CEO Bob Nardelli, who has headed the company since August 2007, said he will depart after the company emerges and completes its alliance with Fiat. He intends to return to Cerberus Capital Management LP as an advisor. Additionally, GMAC will become the preferred lender for Chrysler dealer and consumer business. And Chrysler said that effective May 4, it will shut down its manufacturing operations for the length of the bankruptcy. The federal government will provide Chrysler with $3.3 billion in debtor in possession financing to support the company in bankruptcy. Upon closing the government will loan the new company about $4.7 billion. When Chrysler emerges from court protection, theoretically in 30 to 60 days, its majority owner will be the VEBA, which would own 55% of the new company. Fiat will initially hold 20%, which will gradually increase to 35%. Fiat cannot become a majority owner until all government loans have been repaid. Additionally, the U.S. Treasury will hold 8% and the governments of Canada and Ontario will own 2%. Obama promised that Chrysler's bankruptcy would be "quick and efficient," designed to force concessions from "those last few holdouts," similar to the concessions that most other stakeholders have already made.
The holdouts are Oppenheimer Funds, Perella Weinberg Partners, and Stairway Capital, according to The Detroit Free Press. The trio balked at the original $2 billion offer, as well as an increase of $250 million from Treasury on Wednesday evening, the newspaper reported. Chrysler's largest secured creditors, including JP Morgan Chase ( JPM) agreed to take the deal, exchanging their portion of the company's $6.9 billion in debt for their pro rata share of $2 billion in cash. Meanwhile, Daimler agreed to waive its share of $2 billion in second lien debt and to forfeit its equity stake in Chrysler. And Cerberus agreed to transfer its ownership of the Chrysler headquarters in Auburn Hills, Mich. to the new Chrysler alliance and to abandon a claim it had against Daimler. Obama praised several parties for their willingness to make sacrifices in order to allow Chrysler to continue to operate and "save more than 30,000 jobs at Chrysler" and tens of thousands of jobs at suppliers and elsewhere. "Chrysler management and in particular CEO Robert Nardelli have played a positive and constructive role," he said, while the United Auto Workers "agreed to further cuts in wages and benefits." Additionally, "several manager financial institutions led by JPMorgan agreed to reduce their debt to less than one third of its face value to help free Chrysler from its crushing obligations." He also praised the Canadian government and Daimler. Chrysler said the deal "will allow Chrysler and Fiat to fully optimize their respective manufacturing footprints and the global supplier base, while providing each with access to additional markets. Fiat will make power trains and components at Chrysler plants in the U.S. The new company would be the sixth largest global automaker.
The company said it will file under Section 363 of the Bankruptcy Code in an effort to expedite the case. Theoretically, the filing should enable emergence in 30 to 60 days. Obama called Chrysler "an icon (that) has been a pillar of our industrial economy, but frankly a pillar that's been weakened. For too long, Chrysler moved too slowly to adapt to the future."