When it comes to saving Chrysler, the cost of trying to revive the troubled company may be a painful one, but it’s one that the Obama administration believes is essential to keeping the economy from a deeper plunge. Chrysler recently declared bankruptcy. Under the new plan, majority bondholders (mostly banks) will receive a major equity stake, as will the UAW, reportedly. The minority bondholders who wanted a sweeter deal than either the unions or the majority bondholders will likely see their debt holdings wiped out.
Chrysler will emerge in a month or two from the Chapter 11 protection, and will try to continue its turn-around. The first step will be the formal commencement of its partnership with Italian automaker Fiat SpA. In order to try to make sure that the tie-up succeeds, the government is reportedly giving the pair a big gift -- reportedly forgiving Chrysler's $7.5B USD in loans.
Robert Manzo of Capstone Advisory Group first broke news when he suggested that he had knowledge of the talks and believed that the government would release Chrysler of its financial obligations. A $4 billion bridge loan was given to Chrysler in the closing days of the Bush administration, a $300 million fee on that loan, and the $3.2 billion in financing approved last week by the Obama administration to help Chrysler tackle bankruptcy. A source in the Obama administration confirmed that Chrysler won't be repaying the loans.
In total, the forgiven debt will equate to approximately $24.50 per U.S. resident (or somewhat more per taxpaying citizen). The government does hope to recover some of the bridge loan funding from Chrysler Financial, but it won't bother Chrysler about repayment. Taxpayers do get an equity stake out of the deal, though -- 8 percent of Chrysler. The government is counting on that equity stake to help repay taxpayers.
States the administration source, "The reality now is that the face value [of the $4 billion bridge loan] will be written off in the bankruptcy process. While we do not expect a recovery of these funds, we are comfortable that in the totality of the arrangement, the Treasury and the American taxpayer are being fairly compensated."
The Canadian government will similarly forgive $900M USD in bankruptcy funding it is giving to Chrysler. The U.S. government still expects Chrysler to repay the $4.7B USD loan it plans to give the company when it exits bankruptcy. Chrysler has said it will also need $1.5B USD in additional funding by June 30, 2010.
Bob Corker, R-Tenn., a vocal opponent of the original Bush administration bailout states, "I've known for sometime that with the capital structure of the company and the situation it was in, we would not be paid back. There were several secured lenders ahead of us, and they're not getting most of their money."
Meanwhile the government mulls over the problem of GM. GM has been loaned $15.4B USD, thus far. And with a possible bankruptcy filing looming, it may need even more funding to guide it through bankruptcy. It similarly is unlikely to be able to repay its debt obligations, and these obligations will far eclipse those of Chrysler and will likely pose an even greater headache to Chrysler.