Tim Geithner, U.S. Treasury Secretary, is flatly rejecting a new proposal by Chrysler debt holders.
“A more constructive position” is needed on the part of Chrysler LLC’s lenders, the U.S. Treasury Department is saying, in response to a proposal by banks, private equity firms and others who hold $6.9 billion in the automaker’s debt – and who could be the final obstacle to a deal that saves Chrysler from bankruptcy.
Late last month, President Barack Obama gave the flailing automaker 30 days to pull its financial house in order and complete a strategic alliance with its Italian white knight, Fiat SpA, otherwise Chrysler would be forced to file for court protection. Few believe the U.S. maker would be able to emerge from bankruptcy and would most likely be broken up and sold in pieces.
To meet the White House mandate, and to win over Fiat CEO Sergio Marchione, Chrysler needs to complete a number of steps that include winning new concessions from its workers – both in the U.S. and Canada – and restructuring its heavy debt load.
Negotiators for the various lenders earlier this week proposed a complex agreement that would allow them to continue to hold $4.5 billion in secured debt, give them $1 billion in preferred equity in the new company formed by an alliance with Fiat, and another 40% of that company’s common shares. Industry sources say the lenders also demanded a $1 billion investment by Fiat which, until now, had expected to gain a 35% or larger stake in Chrysler for no up-front cash.
The proposal, by a consortium that includes by JPMorgan Chase, Citibank, Goldman Sachs and Morgan Stanley, came just a little more than a week before Obama’s deadline as negotiations intensified. Some of these banks are responsible for the global financial meltdown that is currently threatening the viabilityof all automakers.
The proposal is in sharp contrast to what the Treasury Department wanted: to wipe out all but $1 billion in debt, so that the Chrysler has a chance at surviving as the current Great Recession continues. And it has triggered a sharp rebuke from Washington. Some critics view it as an attempt to steal the company and its potential profits even as taxpayers continue to help make Chrysler a going concern.
“It is neither in the interest of Chrysler’s senior lenders nor the country for them to advance a proposal that would yield them an unjustified return as Chrysler, its employees and other stakeholders are working tirelessly to help this company restructure,” read the Treasury statement. “Our hope and expectation is that these lenders take a more constructive position in the coming days that reflects the actual situation that they and the company face.”
Chrysler officials declined comment on the lenders’ proposal since negotiations are ongoing and while liekly continue up until the April 30th deadline.
Chrysler is facing other problems, as the clock winds down. The Canadian Auto Workers Union has so far refused to grant the package of concessions the automaker and the Treasury Dept. are seeking, insisting workers will not provide Chrysler more givebacks than were recently approved for General Motors.
On a more positive note, Chrysler has reportedly won an agreement from Cerberus Capital Management, which acquired the automaker in 2007, that the once giant private equity firm would give up all its equity and forego any profits as part of the proposed alliance with Fiat. But Cerberus would hold onto Chrysler Financial, the automaker’s more successful captive lending unit.
Meanwhile, there are unconfirmed reports that Daimler AG, Chrysler’s former German parent, is ready to complete a deal for its own 19.9% stake of Chryler LLC, which Daimler values on its books as $0.0. The company, which now owns both the Mercedes-Benz and Smart car brands, even though it has already written off the value of its Chrysler holdings, it still wants some compensation in return for relinquishing them. Welcome to the world of finance capitalism. Daimler still faces liabilities of more than $1 billion if Chrysler goes bankrupt.