Chrysler will file for Chapter 11 bankruptcy

Chrysler will file for bankruptcy after talks with a small group of creditors crumbled just a day before a government deadline for the automaker to come up with a restructuring plan, President Barack Obama said Thursday.

The Obama administration said it had long hoped to stave off bankruptcy for the nation's third largest automaker, but it became clear that a holdout group wouldn't budge on proposals to reduce Chrysler's US$6.9 billion in secured debt. Clearing those debts was a needed step for Chrysler to restructure by the Thursday deadline.

Chrysler will file for Chapter 11 bankruptcy protection in New York, giving Chrysler time to galvanize a partnership with the Italian car maker Fiat Group SpA. The government, which has already poured $4 billion in loans into Chrysler, would provide up to $8 billion more to carry the company through bankruptcy, said senior administration officials speaking on condition of anonymity. The government will also help appoint a new board of directors.

The deals give Chrysler "a new lease on life," President Barack Obama said.

"This is not a sign of weakness," he said. "I have every confidence that Chrysler will emerge from this process stronger and more competitive."

Under bankruptcy, Chrysler would still sell cars and the government would back its auto warranties.

The officials, speaking on condition of anonymity because the terms of the bankruptcy had not yet been released, said there would be no job losses or plant closing due to the Chapter 11. But it will be up to Fiat and Chrysler to decide whether to restructure the steadily shrinking company.

Obama said Chrysler Financial, the arm of the company that makes loans to buyers and to dealers to finance their inventories, will be merged into GMAC Financial Services, once General Motors Corp.'s finance arm. The new GMAC will get government support.

The Treasury Department's auto task force has been racing in the past week to clear the major hurdles that prevented Chrysler from coming up with a viable plan to survive the economic crisis ravaging nation's automakers.

Along with the Fiat deal, the United Auto Workers ratified a cost-cutting pact Wednesday night.

Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler's debt in return for $2 billion in cash.

But the administration said about 40 hedge funds that hold roughly 30 per cent of that debt also needed to sign on for the deal to go through. Those creditors said the proposal was unfair and they were holding out for a better deal.

A person briefed on Wednesday night's events said the Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. But in the end, this person said most thought they could recover more if Chrysler went into bankruptcy and some of its assets were sold to satisfy creditors. This person asked not to be identified because details of the negotiations have not been made public.

Fiat will obtain a 20 per cent stake in Chrysler in return for giving the company access to its fuel-efficient technology, a move toward cleaner cars that the Obama administration thinks is critical to Chrysler's future survival. The company has committed to building Fiat cars in Chrysler factories, to be sold as Chryslers.

The bankruptcy will be filed under a section of the law that allows a company to shed bad assets and some liabilities. The administration expects it to last only up to 60 days.

Obama's auto task force in March rejected Chrysler's restructuring plan and gave it 30 days to make another effort, including a tie-up with Fiat. The company has borrowed $4 billion from the federal government and needs billions more to keep operating.

The UAW agreement, which would take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler's U.S. facilities and to share key technology with Chrysler.

Meanwhile, the Fiat partnership means Chrysler CEO Robert Nardelli could be out of a job. In an April e-mail to employees, he said that if the deal is completed, Chrysler would be run by a new board appointed by the government and Fiat. The new board, Nardelli wrote, would pick a CEO "with Fiat's concurrence."

Sergio Marchionne, CEO of the Italian automaker, told reporters earlier this month that he could run Chrysler. Obama said Wednesday that Fiat's management "has actually done a good job transforming their industry."