George S. May Business Blog

Judge clears the sale of Chrysler to Fiat

Judge Arthur Gonzalez (pictured left) of New York’s U.S. Bankruptcy court has approved the sale of the majority of Chrysler’s assets to Fiat, nearing Chrysler’s emergence from Chapter 11 protection.

“The Fiat transaction was the only alternative available, and [a] better option, to liquidation,” read the written ruling from Gonzalez.

President Obama had set a goal of completing the bankruptcy procedure within 60 days of the April 30 filing. This ruling makes such a goal all the more likely.

Sunday’s ruling helps Chrysler, which filed for bankruptcy protection April 30, meet President Obama’s goal of completing the bankruptcy procedure within 60 days.

“Keep in mind, many experts said a quick surgical bankruptcy was impossible,” said Obama, in a press conference on Monday. “They were wrong.”

Obama emphasized the need to completely restructure Chrysler and General Motors through bankruptcy to rid them of unwieldy debt. While more job losses and plant closings are likely in the near future, Obama said “tens of thousands of jobs will be saved” as a result of the bankruptcies.

The process has been closely watched by General Motors, which filed for its own bankruptcy on Monday, just hours after the Chrysler ruling from Gonzalez.

If its court hearings bear any resemblance to Chrysler’s, then GM should expect limited opposition to its bankruptcy, said Richard Tilton, corporate bankruptcy attorney and analyst for credit analysis firm Covenant Review.

Also, based on Chrysler’s success, he said GM should be able to keep paying its “essential claims” for suppliers, warranties, customer incentives and dealer reimbursement programs throughout the bankruptcy process.

“I think the decision with Chrysler sets a nice precedent for GM,” said Tilton, who is not involved in the case.

Now, it must be said, not all parties involved were in favor of the deal.

 From CNN Money:

“The Chrysler ruling capped three days of hearings that included six hours of testimony from Robert Nardelli, who is serving as chief executive during the bankruptcy process.

“Much of the testimony featured cross-examination by lawyers representing three Indiana funds with a 1% stake in Chrysler that opposed the deal.

On Monday, the state of Indiana appealed the judge’s ruling, on behalf of the pension funds for state police officers and teachers, as well as a fund for major construction projects.

“Unsecured creditors got better value than secured creditors, and that’s wrong,” said Indiana Treasurer Richard Mourdock.

Mourdock said his state would lose $43 million because of the bankruptcy, though the pensions for police officers and teachers are not at risk.”

Gonzalez countered, saying that “the debtors are receiving fair value for the assets being sold.”

“Not one penny” of the debtors’ assets is going to anyone other than the senior lenders, he wrote.

Here are the details that have emerged from the Chrysler-Fiat deal:

Chrysler now has the go-ahead to sell its best assets (including, but not limited to the best performing factories and dealerships) to new version of itself called the Chrysler Group.

The UAW will own a majority stake of 55% and Fiat will own 20% initially. Minority stakes would go to governments: 8% for the United States and 2% for Canada.

If Fiat is able to reach certain goals, their stake will eventually increase to 35%. Also, if Fiat can pay off all outstanding debts to the U.S. Treasury and Export Development Canada Fiat stands to acquire another 16% stake in the Chrysler Group.

The unfortunate side, for those whose business is associated with Chrysler, is that the ruling allows Chrysler to leave behind the assets it does not want. In other words, the thousands of employees of eight factories and 789 dealerships could find their jobs in jeopardy.

To keep the company afloat, Chrysler received $4 billion from the Treasury Department in December and $4 billion more this year. But after many of the company’s creditors rejected a debt-for-equity swap to help the company restructure, the Obama administration forced the automaker to seek Chapter 11 bankruptcy protection.

Gonzalez’s ruling noted that time was of the essence in processing the bankruptcy.

“The government entities, the funding sources for the Fiat transaction, have emphasized that the financing offered is contingent upon a sale closing quickly,” he wrote. “Moreover, if a sale has not closed by June 15th, Fiat could withdraw its commitment.”

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