A Report on the Chrysler Bankruptcy

May 9, 2009

With the announcement that Chrysler had filed for Chapter 11 bankruptcy protection, the car company made a first at trying to salvage its operations. The move was done also to prepare for its partnership with the Italian automaker, Fiat.

President Obama expressed his sentiments and hoped that the bankruptcy proceeding would be quick and efficient, and that the arrangement with Fiat “will give Chrysler a chance not only to survive, but to thrive in a global auto industry.”

Chrysler is a precarious position and the bankruptcy will be a complicated solution. With the automaker having serious problems selling its automobiles, given the current market, there are not enough company funds to facilitate the smooth bankruptcy proceedings. Fiat has not offered any funds to support its 20% share in Chrysler.

The flagging automaker is in the dubious position of being in worse condition than General Motors.

Should the company be liquidated, the creditors would be entitled to its share of the value based on its individual claim. While some creditors wished to bring that option to that table during valuation hearings, the consensus remained in favor of keeping Chrysler intact.

This issue has riddled the proceedings with conflict among the automaker’s various creditors. Demands for a solution to the fair value debate may be on the horizon. Those creditors with a claim of up to two-thirds or more of the total debt amount retain the advantage to force smaller creditors to accept the 32 cents on the dollar compensation terms of the bankruptcy.

While it may be too soon to tell, there could be further legal controversy regarding the role that the major debt holders like Citibank, Morgan Stanley, JP Morgan Chase, and Goldman Sachs will play in determining that two-thirds threshold.

There is little certainty in the sometimes-murky waters of Chapter 11 bankruptcy proceedings-especially when a major automaker like Chrysler is involved.