Chrysler Restructuring Plan: Three Options, One Reality
By Michelle Krebs March 1, 2009By Bill Visnic
The restructuring plan Chrysler LLC submitted February 17 to the U.S. Department of Treasury maps three potential outcomes -- and all will be expensive.
Short of the most-drastic scenario -- liquidation -- Chrysler's other two options, if they are to lead to the company's long-term viability, are dependent on a number of questionable assumptions and one indisputable fact: If auto sales in the U.S. do not increase quickly and markedly, nothing Chrysler does is likely to pull it from its death spiral.
The 177-page Chrysler Restructuring Plan for Long-Term Viability presented for public consumption lays out three potential courses: a "standalone" reorganization; a "partner plan" with Europe's Fiat S.p.A. that also presents an option of merging or otherwise consolidating with a different automaker (presumably General Motors Corp.); and the outright liquidation of the company, which in this document Chrysler terms an "orderly wind down."
The final-solution omen of the orderly wind-down option is simple and most easily digested: Chrysler says the financial and social cost of a failure by the government to assure the company continues operations -- via either of the first two plans -- will be magnificently more than the public investment in Chrysler's stand-alone reorganization or its partnering or consolidating with another automaker.
Chrysler doesn't spend much time with the orderly wind-down option, saying the direct cost will be some $24 billion (and countless billions in lost personal-income and Social Security taxes from 40,000 displaced Chrysler employees and the loss of 3,300 dealers). Chrysler concludes: "Granting loan request for $5 billion (the amount asked for by March 31 to keep the company operating) is in best interest of U.S. taxpayers."
Stand-Alone Scenario Requires Ultimate Optimism
Chrysler's stand-alone option isn't reliant entirely on the $5 billion the company needs by March 31. It also is predicated on a number of other assumptions, including:
- $6 billion over three years of cash infusion from the U.S. Department of Energy for high-efficiency technology investment. These so-called "Section 136" funds are meant to be directed toward research and product development. However, it has been widely speculated in the analyst community that the automakers view Section 136 as an open candy jar to fund general operations.
- The United Auto Workers (UAW) union's agreement to restructure the billions Chrysler owes to the UAW's Voluntary Employee Benefit Association (VEBA) account earmarked to assume the cost of retiree health care, and defer the 2010 payment "until 2011 and beyond." This includes assuming the 2009 obligation for health care out of the existing VEBA account.
UAW and Ford Motor Co. have negotiated an agreement to allow Ford to pay some of the VEBA contribution in stock. The UAW's membership at Ford will vote on the move.
- A "permanent funding solution" for Chrysler Financial.
Chrysler also lists alternatives to raising $5 billion if the Treasury Department does not grant further funding. These include conversion of common and preferred stock from the company's three primary creditor groups: first-lien secured lenders; second lienholders (Chrysler and owner Cerberus Capital Management); and the third-tier lender, the U.S. government.
One or more of the groups also could agree to modified debt conversion or a cash-out strategy.
At any rate, liquidity is the key for Chrysler. It must reduce its debts and improve its cash flow. If the company cannot improve its leverage position -- and pump up revenue via a necessary improvement in the U.S. Seasonally Adjusted Annual Rate of sales to at least 10.1 million units -- little the company does will matter.
"If our liabilities are not restructured and U.S. Treasury additional funding is not received by March 31, 2009, Chrysler LLC will not have ample liquidity to operate and will therefore move forward with Alternative III 'Orderly Wind Down' only after appropriate board approval and notification to U.S. Treasury," Chrysler says in the document.
Suppliers, Dealers at Risk = Chrysler at Risk
Chrysler also said 21.8 percent of its suppliers are "in trouble." The company says the desperate liquidity shortfall in the supplier network presents a significant threat to automaker restructuring.
The Department of Treasury currently is considering a request from the Motor & Equipment Manufacturers Assoc. supplier group for $18.5 billion in emergency funding to help stabilize financially hobbled parts makers.
And the company said some 27 percent of dealers are at risk. The company lost 74 dealers in the last quarter of 2008, with its dealer ranks shrinking to 3,298
Optimistic Trends
Meanwhile, Chrysler said cost-cutting initiatives already under way -- apart from any windfall from an adjustment in its VEBA obligation -- will reduce its fixed cost per unit from $6,304 in 2009 to just $4,811 by 2012.
There also are large projected reductions in the cost of hourly labor: from a total of $75.68 per hour in 2006 to just $49 after already agreed-upon and new concessions from the UAW kick in.
And the company actually projects worldwide sales to increase by some 300,000 units by 2012 if it can pull off its stand-alone scenario.
Partnering With Fiat -- and Everybody Owns a Piece of Chrysler
Chrysler presents an optimistic case for the advantages of partnering with Fiat. But one aspect of the proposal is defining: the company signals no direct cash benefit until 2012. And savings from the "synergies" of collaborating are detailed at just $6.9 billion -- over an eight-year span.
The company said in the document the partnership would help it deliver 24 new vehicles in a four-year span, including an all-electric roadster in 2010.
Beyond the same kind of hopeful merger strategies common to auto-company tie-ups of the past, Chrysler presents a variety of technologies it said can advance the company's competitiveness in the U.S. and world markets, including advanced diesel and gasoline-engine innovations.
But many of these technologies -- or at least similar ones -- could just as easily be procured from suppliers. In the case of one example, dual-clutch automated-manual transmissions, Chrysler says it would have access to these transmissions from Fiat, but at a cost of tens of millions to both companies, Chrysler itself recently shut down a mature deal with German supplier Getrag to make similar transmissions in a U.S. plant.
Moreover, if the partnership occurs, Fiat wins an immediate 35 percent equity position in Chrysler, with the potential to "earn" another 20 percent equity, for a total of 55 percent.
Between Fiat, U.S. taxpayers and the multitude of bondholders -- including the UAW and its giant VEBA fund -- being asked to exchange debt or otherwise assume equity in Chrysler, the company seemingly has promised more than 100 percent of its equity.
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