We sent to you earlier this week an Alert on "Chrysler Bankruptcy Filing and Preliminary Impact on Suppliers." As we promised, below is an update based upon our review of the case and observations at the hearings.

Essential Supplier Motion

The Court approved treatment of essential suppliers on a temporary basis. Here is a summary of the Interim Order:

  • Chrysler has authority, on an interim basis, to pay essential supplier claims to the extent such payments are permitted by and consistent with the DIP Financing Facility.
  • Each recipient of an essential supplier payment must continue its existing business relationship with the Debtors, pending the closing of a sale, and with the Purchaser, after closing.
  • Each recipient of an essential supplier payment must continue to extend normalized trade credit to the Debtors, pending the closing of a sale, and with the Purchaser, after closing.
  • Each recipient of an essential supplier payment must provide the Debtors with other business terms on a prospective basis (consistent with past practices and subject to adjustments and modifications contemplated by the applicable purchase orders), including any applicable credit limits, pricing of goods and services and the provision of equivalent levels of service, all on terms at least as favorable to those extended to the Debtors prior to the bankruptcy or on such other terms that are acceptable to the Debtors.
  • Each recipient of an essential supplier payment must agree that the Debtors' standard terms and conditions will continue to govern its commercial relationship with the Debtors, pending the closing of a sale, and with the Purchaser, after closing.
  • Each recipient of an essential supplier payment must agree to release to the Debtors (or the Purchaser), as requested, goods and other assets of the Debtors in the supplier's possession, and confirm that such supplier has no lien on the production tooling based upon the Debtors' nonpayment of prepetition claims.
  • Each recipient of an essential supplier payment must agree not to contest the assumption (and subsequent assignment to the Purchaser) of any purchase order issued by the Debtors to such supplier on the grounds that the purchase order is not an executory contract or on any grounds (other than the failure of a Purchaser other than New Chrysler to provide adequate assurance of future performance).
  • If a supplier accepts an essential supplier payment and fails to provide the trade terms described above, the supplier will be deemed to have received an unauthorized postpetition transfer, and the Debtors may recover the payment or apply it against any outstanding administrative claim held by such supplier.
  • Chrysler may require each essential supplier to execute a trade agreement prior to its receipt of an essential supplier payment that (a) confirms that the essential supplier is bound by the trade terms described above, (b) confirms that the essential supplier has received and agrees to be bound by the terms of the bankruptcy court's order granting the essential supplier motion and (c) contains such other terms and conditions that the Debtors believe is proper, including confidentiality provisions.
  • If no trade agreement is executed, any essential supplier payment will be accompanied by a notice from the Debtors explaining that acceptance of the payment constitutes its agreement to provide the trade terms described above and a copy of the bankruptcy court's order granting the essential supplier motion.
  • The Debtors are authorized to continue their Troubled Supplier Program, including paying or otherwise honoring obligations under existing accommodation agreements, and negotiate and enter into new accommodation agreements with troubled suppliers.
  • The Debtors are authorized to continue their participation in the Supplier Support Program, including paying or otherwise honoring any obligations associated therewith, to the extent any such payment is permitted by the terms of the DIP Financing Facility.
  • The Debtors are authorized to cause Chrysler Receivables SPV to enter into a forbearance agreement with the U.S. Treasury.
  • The Debtors are authorized in their sole discretion to pay 503(b)(9) claims in the ordinary course of business on such terms and conditions as the Debtors deem appropriate, to the extent any such payment is permitted by the terms of the DIP Financing Facility.
  • The Debtors are authorized to make a provisional payment to a Repudiating Vendor that refuses to perform its postpetition obligations under an executory contract and then seek the entry of an order finding the Repudiating Vendor to have willfully violated sections 362 and 365 of the Bankruptcy Code and require the Repudiating Vendor to return the provisional payment to the Debtors
  • The Debtors' banks are authorized and directed to honor checks upon request by the Debtors related to essential supplier claims, twenty-day administrative claims and provisional payments.

As we indicated, the Court approved this relief on an interim basis. The Objection deadline to the granting of the relief sought by the essential supplier motion on a final basis is May 15, 2009, at 12:00 p.m., Eastern Time. Please note that it appears that these terms may not be negotiable. Chrysler may have little if any ability to negotiate terms that are different from the requirements in the order. Suppliers should review the order very carefully before agreeing to the terms of the order in exchange for payment of a pre-petition claim.

Sale to New Chrysler

Although the court approved the Bid Procedures Motion from the bench, no order has yet been entered. The sale to "New Chrysler" probably will go forward.

Chrysler presented the following evidence at the hearing:

  • The Fiat deal was valued at about $4 billion. The form of Fiat's consideration will be its Intellectual Property that it will put into New Chrysler.
  • If the Fiat deal does not occur, Fiat will be entitled to a break-up fee of $35 million.
  • In a liquidation, it was estimated that the recovery for secured creditors could range anywhere from zero to 22% of the $6.9 billion owed.
  • Chrysler emphasized that the bid procedures were important to the sales process to prevent "cherry picking" of assets and to provide maximization of Chrysler's whole enterprise value.
  • Chrysler has an economic interest in a sale being conducted in a certain and short time frame due to the lack of liquidity.
  • To date, no other bids (other than Fiat) to purchase Chrysler have been received since it announced that it cannot survive without an alliance.

In his ruling approving the bid procedures with modifications, Judge Gonzalez made the following statements:

  • The bidding procedures are appropriate and necessary because there is an urgent need to consummate a sale. The assets have been valued and due diligence has been conducted. The notice procedures are appropriate. The $100 million incremental bidding requirement as well as the break-up fee of $35 million to be paid to Fiat in the event the Fiat transaction does not occur will not chill bidding.
  • The following modifications were made to the order to approve the motion:
    • New bidding and creditor objection timeline.
      • All creditor objections must be filed by May 19, 2009, provided that all persons cooperate in discovery.
      • Bids must be submitted by May 20, 2009 (the proposal deadline was May 15, 2009).
      • If bids are received, then a lead bid must be determined by May 26, 2009 (the proposal deadline was May 20, 2009).
      • The sales hearing will be held on May 27, 2009 (the proposal date for the sales hearing was May 21, 2009).
    • Two ways to have a qualifying bid exist.
      • To make clear that the Debtors, consistent with their fiduciary obligations owed to secured creditors, will consider all bids submitted, rather than only those that meet the procedures (to ensure the best deal is obtained): a bid will be qualified if it (a) meets the requirements contained in the Order, or (b) after consultation with the Creditors Committee, the U.S. Treasury, and the UAW, a bid is determined by the Debtors in exercising their fiduciary duty to be a qualified bid.

We are sending this latest Alert on Chrysler in an effort to keep you up-to-date. We will continue to monitor the situation closely. As you can see, the potential exists for many issues to arise regarding Chrysler's suppliers and other creditors. The activity will be fast in this bankruptcy, and we want to keep you informed.