There are several potholes in Chrysler’s bid to emerge from bankruptcy with Fiat as its owner/partner.
Pothole #1 is from the Detroit Free Press:
The sale creating a new Chrysler-Fiat could close Monday afternoon, unless the U.S. Supreme Court decides to hear a last-ditch appeal from three Indiana pension funds.
Thomas Lauria and Glenn Kurtz, representing the pensioners, argued that the government-financed deal puts interests of unsecured creditors such as the UAW’s retiree health care trust ahead of secured lenders, such as their clients. The Indiana pension funds hold $42 million of a $2.6-billion package of loans from four large banks and about 40 investment funds, hedge funds and pension funds. The other lenders have accepted the U.S. Treasury’s offer of 29 cents on the dollar, or $2 billion in cash if they write off their respective portions of the loans.
As I stated in an earlier post, the actions of the court and the Obama Administration in regards to secured and unsecured bondholders is in violation of current bankruptcy law. From Bloomberg.com:
The package the White House hammered together to convert big, old, dying Chrysler into a smaller, healthier car company looks a lot like a massive violation of bankruptcy law. A few dissident creditors, namely three Indiana pension funds that banded together, remain defiant enough to say so.
The Chrysler plan “seeks to extinguish the property rights of secured lenders, trampling the most fundamental of creditor rights in disregard of over 100 years of bankruptcy jurisprudence,” the funds argued in bankruptcy court papers.
However, barring a successful appeal to the Supreme Court, Chrysler will most likely be sold to Fiat by the end of business on Monday regardless of any objections.
Pothole #2 from another Bloomberg.com article:
Indiana Treasurer Richard Mourdock said he was pleased the Court of Appeals agreed to hear the state funds’ arguments that they and other secured creditors have been made secondary to government-preferred unsecured creditors “in contravention of longstanding bankruptcy law.”
“Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government,” Mourdock said yesterday in a statement.
The treasurer said the illegal acts include using Troubled Assets Relief Program funds, designated for aid to “financial institutions,” in the Chrysler sale.
What Mr. Mourdock is objecting to is the use of TARP funds by first President Bush and President Obama to keep Chrysler and GM alive. The TARP fund legislation was very specific as to the uses that the fund was to be used for, and the automotive industry was not included. If you remember, a similar bill to provide relief for the automotive companies was introduced and defeated in Congress. Somewhere down the line, I expect this topic to come up in a future lawsuit, especially if Chrysler later implodes.
Pothole #3 are lawsuits currently in the courts from suppliers, customers, and former partners. For instance:
Getrag Transmission Manufacturing LLC, a German transmission maker also in bankruptcy, had argued that the right to bring a lawsuit against Cerberus was property of its own bankruptcy estate. Getrag contended that by barring it from bringing lawsuits, Chrysler violated the so-called automatic stay that protects Getrag’s own assets in bankruptcy.
Schnader Harrison Segal & Lewis had sought, on behalf of a group called the Ad Hoc Committee of Consumer-Victims of Chrysler LLC, to have the bankruptcy judge appoint an official committee of tort claimants. The Ad Hoc Committee has more than 150 members who each have tort claims involving personal injuries against Chrysler. Those claims were valued by the Ad Hoc Committee’s members and their counsel at a total of more than $650 million.
The new Chrysler is willing to honor warranties on vehicles sold before or after the bankruptcy. But for personal injury lawsuits, Chrysler says it will be responsible only for problems with vehicles sold after the bankruptcy.
What this means that when Chrysler is sold to Fiat, Chrysler would be freed of any liability from those lawsuits. So I wonder if someone could then sue the Federal Government for relief since the Government was complicit in relieving the “new” corporation of its obligations? I can see this one coming…
Pothole #4 are the dealers that are being cut by Chrysler, and some of them have met or exceeded the parameters that Chrysler set to stay in business. From The Oakland Press:
To determine which dealerships would be terminated, Chrysler created a matrix that named the dealers selling fewer than 100 cars per year and those close to another franchise.
Yet McDonald’s two Chrysler dealerships do not fall into either category. Einstandig said both were profitable and had no debt. “Each of her dealerships sell over 100 cars per month,” he said. “That’s 10 times more than the metric that Chrysler put on their rejected profile.”
There is no reason Chrysler would want to terminate two profitable stores, she added, saying she thinks it was a “political decision.”
Chrysler originally told the dealers it would help them sell the cars, but McDonald said the company has been of no assistance.
“They have done nothing so far to help get rid of the cars — absolutely nothing,” she said. “And if they do help you, they’ll charge you $350 a car to get rid of them.” McDonald said the company then hands off the cars to the remaining 2,392 dealers, who already have a surplus of cars and parts.
“So the people that are going forward, they’re getting screwed, too,” McDonald said, adding she thinks dealers are afraid to speak out against the company because Chrysler might switch them to the termination list if they do.
Although she has much work to do, McDonald said it may be a blessing in disguise that her stores are being forced to shut down.
“Quite honestly, I think I’ve been spared because dealing with these people is like dealing with the devil, and I want nothing to do with them at all,” she said. “And I’m not saying that because I was rejected. I’m truly saying that in the last three years, that company is just not a moral company at all.”
I can understand McDonalds last statement. At the risk of violating my termination agreement with Chrysler, I can only state that I observed and heard of business practices that, while they may not have been illegal, I believe they were definitely unethical. Which leads to –
Pothole #5 is the public’s perception of the whole ordeal. The longer that this “sale” to Fiat drags out, the worse it seems. But on the other hand, if the sale is completed quickly, and a lot of stuff comes out, then that can damage an already shaky company.
The Last Word: The bottom line is that Chrysler/Fiat needs to start up fast, bringing to market vehicles that are solid, well built, and have great styling. Unfortunately, the mileage isn’t there, and that will be something that will also become very important as we are now seeing fuel prices edging up. And from a personal standpoint, I just don’t see it happening, although I do hope that I’m wrong for the sake of my former coworkers.
Chrysler will be sold to Fiat – period. After that, it’s anyone’s guess