On Thursday, under pressure from the Obama administration, Chrysler and 24 of its wholly owned U.S. subsidiaries filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. None of Chrysler’s Mexican, Canadian or other international subsidiaries are part of the filing. Although the company was able to reach agreement on a “comprehensive restructuring plan” involving Italian automaker Fiat S.p.A. and the UAW, as well as the Obama administration and the Canadian and Ontario provincial governments, among other key constituencies, the company was unable to meet the requirements of a late-April deadline imposed by the White House after some lenders refused to accept the terms of a proposed debt exchange. The U.S. Treasury Department issued a separate “fact sheet” describing in greater detail the terms of the restructuring.

As part of the plan, Chrysler will sell substantially all of its assets to a newly formed company under Section 363 of the Bankruptcy Code in exchange for $2 billion of cash to Chrysler’s secured creditors. Chrysler's largest secured creditors have already agreed to exchange their portion of Chrysler’s $6.9 billion of secured debt in exchange for their pro-rata share of the $2 billion in cash. Both Cerberus and Daimler, Chrysler's current shareholders, have agreed to surrender their equity interests in Chrysler. Diamler has also agreed to pay $600 million to Chrysler’s pension funds in settlement of its guaranty obligation to the PBGC, Cerberus has also agreed to waive its share of Chrysler’s $2 billion of second lien debt, to transfer ownership of Chrysler’s headquarters to the new company, and to contribute a claim it had against Daimler to assist in Daimler’s settlement with the PBGC.

Ownership of the new company will initially be divided between multiple stakeholders, including:

  • A new Voluntary Employee Beneficiary Association, organized by the UAW to provide health benefits to Chrysler employees, owning 55% of the new company’s equity and holding a $4.6 billion note payable over 13 years;
  • Fiat, owning 20%; and
  • The U.S. Government, Canadian Government and Ontario Provincial Government owning proportionate shares of the remaining 10%, of which the U.S. government will own approximately 8%.

In exchange for its 20% ownerhsip interest, Fiat will contribute to the new company a royalty-free license to sue all of its intellectual property and “know how.” The plan also provides incentives for Fiat to increase its stake in Chrysler to 35% when it meets the following objectives:

  • An additional 5% when Fiat brings Chrysler a 40-mpg vehicle platform for production in the U.S.;
  • An additional 5% when Fiat provides Chrysler a fuel-efficient engine family for production in the U.S.; and
  • An additional 5% when Fiat provides Chrysler with access to Fiat’s global distribution network to facilitate export of Chrysler vehicles.

However, Fiat may not become majority owner of Chrysler until all U.S. government loans have been repaid.

Fiat will have the right to designate three directors of the new company. The VEBA will have the right to “select one independent director and will have no other governance rights.” The U.S. Treasury will have the “right to select the initial group of four independent directors, but thereafter will not play a role in the governance or management of the Company.” Canada will have a similar right to select one additional independent director.

Beginning Monday, manufacturing will be temporarily halted at most of Chrysler’s facilities pending completion of the proposed restructuring. The U.S. government has agreed to provide $3.34 billion of debtor-in-possession financing to the company and to provide an additional $4.7 billion of secured financing to the new company “in the form of a term loan with $2.1 billion due in 30 months and the balance 50% due on the 7th anniversary and 50% due on the 8th anniversary of the loan,” plus “an additional note of $288 million which is a fee for making these loans.” The fee equates to 6.67% of the total loan commitments. The Canadian government and the Ontario provincial government (through Export Development Canada) will participate in the debtor-in-possession financing for Chrysler and the secured financing for the new company on a 3:1 ratio with the U.S. government.

The DIP loan is priced at LIBOR plus 300 basis points, with a 2% LIBOR floor, and the margin increasing to 500 basis points upon default. The loan matures in 60 days and requires Chrysler to achieve certain milestones along the way, including a hearing on its sale procedures by May 8, a lead bidder by May 29, a sale hearing by June 1, sale approval by June 15, and closing by June 27.

In addition, Chryusler announced that it had reached an agreement with GMAC to “become the preferred lender for Chrysler dealer and consumer business.”

Bob Nardelli, CEO and Chairman of Chrysler, stated that the “partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages.” Under the terms of the restructuring, Nardelli will resign from his position before the company emerges from bankruptcy. Chrysler has established a new website at which updates regarding the bankruptcy proceedings and the restructuring process will be available. President Obama and Canadian Prime Minister Stephen Harper issued a joint statement after the bankruptcy was announced in which they promised to work together on the General Motors restructuring, and reiterated their general commitment to building a “competitive, environmentally responsible automobile industry for the future.”