Chrysler declares bankruptcy, seals deal with Fiat (2nd Roundup)

By Chris Cermak Apr 30, 2009, 17:56 GMT

Washington - The long ailing US carmaker Chrysler LLC applied for bankruptcy protection Thursday in a New York court after last-ditch efforts to get an out-of-court agreement with its creditors collapsed.

President Barack Obama, who earlier confirmed the anticipated move, said the company had also finalized an alliance with Italy's Fiat Spa, creating the world's sixth largest carmaker. The deal is part of a broader deal being presented in the Chapter 11 bankruptcy.

'This is not a sign of weakness,' Obama said at the White House. 'I have every confidence that Chrysler will emerge from this process stronger and more competitive.'

Chrysler becomes the first of Detroit's 'Big Three' carmakers to declare bankruptcy because of a sharp plunge in sales during the ongoing recession, and could provide some clues to rival General Motors Corp's fate in the coming month.

Senior administration officials insisted Chrysler's would be a quick, 'surgical' bankruptcy - between 30 and 60 days - that would pave the way for the alliance with Fiat. More than 70 per cent of Chrysler's 45 creditors were already on board, but a smaller group was holding out for a better deal.

Chief executive Bob Nardelli will oversee the bankruptcy but will be out of a job once the process is completed, as part of an effective takeover by Fiat and a major shake-up of the company's executive board.

'This was not my first choice,' Nardelli said in a statement. 'I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance.'

Fiat CEO Sergio Marchionne, in a statement from Rome, said the merger would offer the Italian car maker a chance to expand its profile in the United States.

'Our work is just beginning,' he said. 'We are certain that a stronger and more international Fiat will emerge from this alliance, with an even greater capacity to compete in markets worldwide.'

Obama announced the bankruptcy as his Thursday ultimatum ran out for Chrysler, the third-largest US carmaker, to either prove its viability or lose some 4.5 billion dollars in emergency loans.

GM, which has also taken a 15.5-billion-dollar federal bail-out, has a separate deadline of June 1 to restructure its own operations. The US industry leader is still going through similar talks with its creditors to forego some 29 billion dollars in debt.

Chrysler will get up to 3.5 billion dollars in loans from the government during the bankruptcy process and another 4.5 billion dollars as it emerges on the other side, the White House said. The Canadian government will offer additional loans of up to one-third of what the US provides.

Assuming Chrysler is able to survive, Fiat would take a 20-per-cent stake that could be expanded by another 15 per cent as it transfers technology and other incentives to Chrysler's factories. A union retiree health care trust fund would own 55 per cent. The US government will keep an 8-per-cent stake and Canada will get 2 per cent.

The Chapter 11 filing allows the company to get court protection from its creditors. Government-brokered talks aimed at saving the struggling carmaker failed late Wednesday as a group of hedge fund lenders refused to accept an offer of some cash in exchange for larger amounts of debt, making a bankruptcy all but certain.

Chrysler's larger bank creditors including JP Morgan Chase & Co and Citigroup Inc have agreed to an offer of 2 billion dollars in cash in exchange for wiping out 6.9 billion dollars in debt, the White House said.

Obama chastised the smaller group of lenders that had forced Chrysler to go the path of bankruptcy, even after the government sweetened the deal to 2.25 billion dollars.

'I don't stand with those who held out when everybody else is making sacrifices,' Obama said.

Chrysler's workers have also agreed to fresh concessions. The top labour union, the United Auto Workers, on Wednesday approved a new contract that cut salaries and benefits to help keep the carmaker in business. White House officials said they didn't expect further job cuts during bankruptcy.

The last-minute negotiations were designed to pave the way for the alliance with Fiat, another key condition set out by the Obama administration if Chrysler is to survive. Fiat had said it was prepared to take a stake in the company, but without the heavy debt burden.

US carmakers have suffered from a nearly 40-per-cent plunge in domestic car sales since October, as a deep recession has gripped the country. But their troubles have been compounded by a failure to streamline their operations over the last decade and match the greener models produced by foreign competitors.

Obama said he was confident US carmakers would emerge from the crisis and urged US consumers not to abandon the industry.

'If you are considering buying a car I hope it will be an American car,' Obama said.