Chrysler will continue to work with those suppliers who wish to become part of the new enterprise.
Chrysler LLC today announced this morning that it would begin the process of assigning the “overwhelming majority” of the company’s supplier contracts to the new company established in with Fiat SpA once an asset sale is completed as it emerges from bankruptcy. Some of the winners are Alcoa, Continental, Delphi, Johnson Controls, Magna International and Penske Corporation.
Chrysler has also started a process by which suppliers may be paid pre-bankruptcy accounts receivable. Chrysler claims that the amount it is willing to pay is higher than those normally assigned during a bankruptcy process, a contentious assertion no doubt with some suppliers.
About 40% of what is owed is offered immediately, with the balance to be assumed by the new company and paid back over time. Whether its ailing suppliers can last that long is an open question. Roughly 20% of Chrysler suppliers were in the “high risk” or “risk” categories Chrysler uses to assess their financial health, and that was before all of its plants were shut down last month. Typically it takes Chrysler 45 days to pay a supplier after it has received the parts.
The bankruptcy continues to have potential dire consequences for Ford Motor and General Motors since 96 of Chrysler’stop 100 suppliers also supply both of those loss-making companies.
Chrysler will mail letters to approximately 1,200 of its suppliers setting forth the amounts that Chrysler has determined will be required to “cure” all contracts to be assumed and assigned to the new company.
It appears Chrysler will attempt to not negotiate the amounts that it will pay. Some struggling suppliers may have little bargaining power to ask for more.
Suppliers have ten days to dispute the Chrysler amount, and a court hearing is scheduled for June 4th to resolve differences.
Some of Chrysler’s biggest creditors were not on the list in the court filing, which could mean that they will not be part of the supply chain for the new company.
However, the “list is not a complete or final listing of suppliers” for the new company. “Chrysler will continue to work with those suppliers who wish to become part of the new enterprise,” Chrysler said.
Completing this process quickly is an important step in Chrysler’s preparations to restart operations. Chrysler said it “provides suppliers with a fast and efficient way to ensure payment of pre-petition claims and to continue their business relationship with the new company moving forward.”
Chrysler either has or will send a letter to suppliers whose contracts or leases have been designated for assumption and assignment. Chrysler hopes this will help expedite the process of transferring contracts and/or leases to the Fiat; and provide counter parties with near-term payment for claims arising prior to the filing of Chrysler’s bankruptcy cases. In exchange, Chrysler has asked its suppliers to accept its estimate of the amounts owed them by Chrysler prior to April 30, 2009.
“I know there was great anxiety in the supplier community when we announced Chrysler’s Chapter 11 filing. This should be a great relief. The terms are fair and far better than the treatment trade creditors usually get in a bankruptcy case, and provide a mechanism for quick resolution of all open issues,” said Scott Garberding, Senior Vice President and Chief Procurement Officer.