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Friday, August 5, 2011

TARP Assistance for Chrysler: Restructuring and Repayment Issues

Baird Webel
Specialist in Financial Economics

Bill Canis
Specialist in Industrial Organization and Business

The recent recession and accompanying credit crisis posed severe challenges for all automakers, but especially for General Motors and Chrysler. Executives of both companies testified before congressional committees in fall 2008 requesting federal bridge loans. Legislation that would have provided such financial assistance passed the House of Representatives but did not pass the Senate. In lieu of that assistance, the Bush Administration turned to the Troubled Asset Relief Program (TARP), a $700 billion program that was enacted in October 2008 to shore up the financial system and prevent spillover in the broader economy.

The Bush Administration used TARP to provide both automakers and two auto financing companies with nearly $25 billion in loans, and told the automakers to submit viability plans if they were to seek additional aid. Chrysler submitted such a plan in February 2009, outlining how it planned to restructure its operations, including a strategic alliance with Fiat. Some questions were raised as to whether Chrysler could survive as a free-standing company, even with government assistance, because of its relatively small size. The Obama Administration rejected Chrysler’s initial viability plan as insufficient and gave the company 30 days to develop a new plan in an effort to avert bankruptcy. Working with the Administration’s Auto Task Force, Chrysler developed a restructuring plan that included a revised labor agreement, cost reductions from dealers and suppliers, reductions in creditor claims, and limitations on executive compensation.

Despite agreement with most stakeholders, all creditors did not agree to the restructuring, prompting Chrysler to file for bankruptcy in April 2009. With much of the restructuring plan in place, however, the bankruptcy court was able to quickly approve the proposals, including a creditor agreement. Many of the assets of Old Chrysler were sold to a new legal entity, Chrysler Group LLC, whose largest equity owner was the United Auto Workers’ retiree medical trust fund, owning 67.7%. Fiat took a management role in the new company and a 20% equity stake, which was deemed central to the survival of New Chrysler.

Under new Fiat management, New Chrysler revamped nearly its entire fleet of automobiles and light trucks, and it turned a profit in the first quarter of 2011 for the first time since bankruptcy. Its commercial and financial success accelerated its plans for repaying federal assistance. In May 2011, New Chrysler repaid a $5.9 billion debt to the U.S. government that was not fully due until 2017. In June 2011, Fiat agreed to purchase the U.S. government common equity interests and options in New Chrysler for $560 million, a transaction that closed July 21, 2011. In addition, the ownership of New Chrysler significantly changed as Fiat met a series of performance benchmarks that has allowed it to raise its equity stake. By the end of 2011, it is expected that Fiat will own 58.5% of New Chrysler. At that time, its management has said it may more fully integrate the two companies.

Of the $10.9 billion that was loaned to Chrysler through TARP, not all of it will be recouped by the U.S. Treasury. Following the transaction that closed on July 21, 2011, the U.S. government has no remaining financial interest in New Chrysler. Although $9.6 billion of the assistance given to the company has been recouped, an approximate $1.3 billion shortfall remains.

Date of Report: July 27, 2011
Number of Pages: 15
Order Number: R41940
Price: $29.95

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