Washington Post details Chrysler bankruptcy plans

Though Chrysler appears to have reached agreements with the UAW, with Fiat and with their major debtholders, they could still be forced into bankruptcy if a group of smaller creditors do not agree to write down most of the loans they’ve given to the automaker. The Washington Post reports on what such a bankruptcy would look like:

If the bankruptcy proceeds as expected, the administration would create a new Chrysler that would purchase assets of the old company. The ownership of the new company would be divided between the union’s retiree health fund, which would get a 55 percent stake, Fiat, which would get at least a 35 percent stake, and the United States, which would take an 8 percent stake. The Canadian government would receive two percent.

Chrysler’s creditors would get $2 billion in cash and no equity stake. The automaker’s current owner Cerberus Capital Management would be wiped out.

This conflicts with earlier reports that the creditors would get a 5% stake in the new Chrysler. The smaller creditors who are still holding out may continue to do so because their loans are secured and they think they can get a better outcome in a bankruptcy court:

While four of Chrysler major creditors, J.P. Morgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley, have agreed to the Treasury’s plan, other lenders, mainly hedge funds, have held out. One source said the holdouts include Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital. Treasury officials spent much of today engaged in last-minute negotiations with the funds.

Some hedge funds likely believe they could get a better return in a bankruptcy filing or in a sale of Chrysler’s assets, said Sheldon Stone, a turnaround expert at Amherst Partners.

“These rogue hedge funds are not coming in line because they feel like the government is attempting a cramdown, which is essentially a take it or leave it deal,” he said.

Under the deal, Fiat could take a larger ownership stake in the company as the government loans are paid off and the government’s stake in the company is reduced. But the 55% ownership stake by the UAW is the really unprecedented part of the deal. That’s something that has never been done with a company this large.