Chrysler's Fate

Copyright © 2009, Greenwich Financial Management Inc., a registered investment advisor.

Readers of this column know the dim view we have taken of Chrysler’s prospects (see “Panic in Detroit,” March 9, 2006). We doubted the wisdom of Cerberus in acquiring Chrysler from DaimlerChrysler (now DaimlerBenz) (see “Chrysler on the Block, February 2, 2007), saying we had “trepidation” for the financial health of their limited partners. Then, more recently, we predicted, “Among major financial disasters in the making is Chrysler…Cerberus named Robert Nardelli, who virtually destroyed Home Depot, as CEO. Chrysler was already somewhat poorly positioned in product line, but look for this management to bring the firm to its knees” (“Wall of Worry,” 3/14/2008).

The federal government has provided $5.5 billion in TARP money to Chrysler and Chrysler Finance. Nardelli did some necessary cost cutting and reorganizing, while leaving the product lineup not much changed. Chrysler continues to bleed cash, and its sales in April were down 48% versus April one year ago, a worse drop than that of any other major carmaker. The incoming Obama Administration officials sought a settlement with parties out of bankruptcy, or, alternatively, a “pre-packaged” bankruptcy. Chrysler had been in talks with Fiat, led by the expansive CEO Sergio Marchionne, and the government insisted that any further government financing would depend on a definitive Fiat alliance. The government obtained major concessions from the United Autoworkers and the major creditors, but it would not accept the position of a group of “holdout” secured creditors, including some traditional money managers and hedge funds, who asserted that the offer was too generous to workers and unfair to lenders. Chrysler filed for bankruptcy under Chapter 11 on April 30th, a decision announced by the White House rather than management.

Fiat is not an obvious white knight for Chrysler. Like Chrysler, it has a reputation for unreliability; also like Chrysler, it has only begun to focus seriously on these issues in the last few years. It was not for nothing that automotive enthusiasts used to say that Fiat stood for “Fix It Again, Tony.” Moreover, Fiat is not offering to bring any cash to the table. Finally, it’s not clear that a Euro-American enterprise will be able to survive the coming ferocious competition with China. Warren Buffett’s Berkshire Hathaway has been investing with Chinese conglomerate BYD, which may well beat Detroit off the blocks with an inexpensive electric plug-in vehicle. (See “Warren Buffett Takes Charge,” by Marc Gunther, Fortune, 4/13/2009).

A positive factor is that Chrysler is known for large engine vehicles, whereas Fiat is associated with a line of smaller, fuel-sipping Euro-cars such as the new Fiat 500. Quattroroute, an Italian periodical, has reported that Fiat is developing a hybrid gas/electric system for small cars that it would also offer through Chrysler. A second positive factor is that Chrysler would be combined into a larger and more economic enterprise, possibly also to include GM’s European operations. Source: Autobloggreen.com.

Under the proposed reorganization plan, secured creditors would receive 33 cents on the dollar, while unsecured creditors would receive 9.2 cents per dollar of investment. Likely ownership, if reorganized: 55 percent of the company to the UAW (which it plans to sell to fund its new Voluntary Employee Benefits Association, or VEBA, which will assume responsibilities for health care), 20 percent to Fiat, 8 percent to the U.S. government, and 2 percent to the Canadian and Ontario governments. Car News Blog at Motor Trend. The remaining 15 percent goes to creditors. Fiat’s 20% could rise five percent at a time up to 35% if it meets certain benchmarks. Cerberus would retain zero equity (on an investment of $7.4 billion in 2007), as would DaimlerChrysler (of its remaining 19.9% stake).

Chrysler has shuttered its factories pending emergence from bankruptcy. Whether Chrysler emerges as a going concern, or goes into liquidation under Chapter 7, depends largely on the speed of that process. The Administration optimistically hopes for a “surgical” 60 day proceeding. However, the process could easily drag on much longer, which would be fatal.

Note: Clients advised by Greenwich Financial Management Inc. may hold long or short positions in securities mentioned in this article or in derivatives of those securities. The author of this report has no personal holdings or interest in the referenced investments and has received no compensation for providing the above research from any of the listed companies. The information is not sufficient by itself to make an investment decision. The suitability of such investments for particular individuals has not been assessed.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.