After months of talk, last week America’s weakest of the Big 3 Automakers, Chrysler, finally bit the bullet and filed its Chapter 11 Bankruptcy Petition. The case (luckily for Chrysler) drew an outstanding Bankruptcy Judge, Arthur Gonzalez, a veteran of the Enron (filed Dec. 2001; Reorganization Plan approved: July 2004 – lightning fast for these monster cases!) and other massive bankruptcy cases, and was a ‘pre-packaged’ one, in the sense that as much as possible has been planned ahead to streamline the proceedings.
The media has reported what sound like overly-optimistic time estimates that would have Chrysler emerging by mid-Summer, after its shotgun marriage with Fiat, who has hungered for decades to have an American dealer network and to re-make its old 60’s and 70’s image for building cars that break and are hard to fix.
Over at GM, they are watching this one intently. If Chrysler manages to emerge from its Chapter 11 Reorganization as a slimmed-down, but healthier auto manufacturer with a few good models, this will undoubtedly spur on an even more complex and massive Bankruptcy, when GM decides to stop bleeding and to stop taking your and my tax dollar transfusions, and, instead, to take the plunge into a Chapter 11 Reorganization itself.
Chrysler’s is the first major US Automaker Bankruptcy since Studebaker did it back in 1933, in the midst of that Great Depression. One benefit that will quickly inure to Chrysler’s filing is that it will be able to almost immediately begin to shed dealers from its now too-large network. This is something that, without the seemingly ‘magic’ powers of the Bankruptcy Code to reject or accept existing contracts, would be both very hard to do and very costly, due to major federal and state law protections for auto dealers, enacted some time ago to protect them from predatory conduct by the Big 3.
Chrysler will also attempt to continue business as usual as what is called a Debtor in Possession (known simply as a “DIP” to those in the Bankruptcy law world), but, it will close some manufacturing plants according to latest reports; some temporarily and some for good.
A big question is what will happen to all those retirees and those about to retire – the Big 3 are sometimes known as Health Care Companies who happen to Manufacture Vehicles by the more cynical observers because, like an iceberg with only the tip showing above water, the Big 3 tow around many, costly retired workers and their once-believed-to-be vested retirement and health care benefits. Another is whether or not the UAW will become the first union to become a majority owner in a Big 3 US Auto Manufacturer.
And, if that were to occur and the UAW were suddenly to own 55%, or so, of the New Chrysler, whether the newly found ‘pride of ownership’ might motivate auto workers to do things they might not ordinarily do and to give up hard won benefits in order to make the New Chrysler a success.
The unprecedented and not–lately-seen are becoming much more frequent now as we enter new record territory for the length of this economic mess that we are all still very much in. Old nagging questions remain: would you buy a new car from an auto manufacturer in Bankruptcy?
Also, there is no assurance that Chrysler will emerge from this Chapter 11 Bankruptcy – using the car wash analogy I have used before on this topic – imagine the Chapter 11 Reorganizing Bankruptcy process like driving your car through the car wash so you come out on the other side with a newly washed, waxed and truly spiffed up vehicle, ready to be towel-dried, and for you to drive off in, enjoying your vehicle. As distinct from the car wash, however, there are no guarantees whatsoever that Chrysler can, or will, emerge whole, or even still breathing, from this Chapter 11 Bankruptcy proceeding.
In order for Chrysler to emerge alive, it must come up with, sell to its creditors, and persuade the Bankruptcy Judge to approve, a Reorganization Plan – and, that is far, far easier said than done. If it does not happen, Chrysler’s Chapter 11 Reorganizing Bankruptcy can be converted into a Chapter 7 Liquidation, which would mean that Chrysler would be Kaput, Finis, last one out turn off the lights.
By the way, this happens in many Bankruptcies because the rules concerning a Chapter 11 Reorganization Plan are quite complex, aside from the fact that all whose Ox is Being Gored must approve, or, failing that, the Plan must meet all kinds of tests and scrutiny before the Bankruptcy Judge will be comfortable ordering a “Cram Down,” forcing those creditors who do not approve, to just live with.
Then there are the bondholders who recently rejected Federal offers to convert their bond interests to equity – stock – bonds being debt. You own your house, the people who you send your monthly payments to are like the bondholders of Chrysler – you are like the stockholders.
Chrysler has five major creditors and they are all of the Behemoth Class: Citibank; J.P. Morgan Chase; Morgan Stanley and Goldman Sachs; these five hold a staggering 70% of Chrysler’s debt. They will now get another chance to attempt to rescue their money, or some of it, in the Chrysler Bankruptcy Case and that has the potential to engender more than a few massive and messy fights among squadrons of very high-priced Bankruptcy lawyers, who will swarm all over this case like flies drawn to you-know-what, on a hot day.
To say this bears watching, is an understatement.