Bankruptcy protection decision made to accelerate union with Fiat
30 April 2009

Chrysler is filing for Chapter 11 bankruptcy protection, President Barack Obama has confirmed.

The decision has been made at the behest of the US president, after Chrysler failed to meet his administration's deadline for turning itself into a viable business.

Announcing the decision, Obama, who famously owned a HEMI-powered V8 Chrysler 300C before taking office, said: "The necessary steps have been taken to give one of America’s most-storied companies a new lease on life."

Obama also announced that the US government will give additional aid to GMAC so that it can take over lending to Chrysler's customers and dealers from Chrysler Financial, which the government has said is no longer viable. The Canadian government will also provide financial aid in return for a two per cent stake in the restructured company.

The president said there were no immediate job cuts planned until the restructuring is complete, although the company is expected to close all its US production factories until the Fiat deal is complete. Factories outside the US are expected to remain open. Chrysler also confirmed it will cut the number of dealerships it had, but did not say how many or when.

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Chrysler will use the bankruptcy protection to restructure, and to this end is expected to announce a tie-in with Fiat imminently. During Obama's speech, he said terms had now been agreed in principle with Fiat for the deal to go ahead.

The decision to enter Chapter 11 bankruptcy protection is expected to cost the US government an additional $3.5 billion (£2.4 billion) to keep the company running while its affairs are sorted out. The government has also pledged to provide up to $4.7 billion (£3.2 billion) in aid for the restructured company.

Chrysler’s best assets are expected to be sold to a new entity that will have an ownership structure agreed with Fiat, while its debtors will be given US treasury compensation. The company is expected to remain in Chapter 11 bankruptcy protection for 30-60 days.

Inside sources say Fiat will now become a 20 per cent owner of Chrysler, a union retiree health-care trust fund will hold 55 per cent, and the rest of the company will stay in the government's hands. Fiat's share holding will increase in five per cent increments up to 35 per cent as it hits certain targets. These are creating a US-built 40mpg vehicle platform, providing a US-built fuel-efficient engine family and giving Chrysler access to its global distribution network. Obama also insisted that Fiat will not take a majority share of the company "until every dime of tax payers' money is repaid."

Fiat and the new board of directors of the company will pick a chief executive officer and chairman. Current Chrysler CEO Bob Nardelli will step down immediately after the period of Chapter 11 bankruptcy protection is completed. Fiat’s chief, Sergio Marchionne, has already said he would be willing to run Chrysler if asked.

In announcing his decision to step down, Nardelli confirmed he will return to Cerberus Capital Management LP as an advisor.

"Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat," said Nardelli. "I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance."

Chrysler's president and vice chairman Tom LaSorda has also announced he'll retire. Fiat had reportedly wanted him to stay, but the 54-year-old has declined.

Asked about dealer cutbacks, LaSorda said: "It won't be huge, catastrophic numbers, but it will be a significant reduction."

He also indicated the Fiat 500 will be the first model to be transferred. It is expected to be built in Mexico.

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