Before there was a Motors Liquidation Co, post-bankruptcy GM's hived-off shelter for useless assets, there was Old Carco LLC. That's the company Chrysler built to house its useless assets, and unsurprisingly, it doesn't have good news for unsecured creditors. Old Carco was left with liabilities of $20.5 billion, but has less than half of that to pay off everyone it owes.
The latest accounting says there is $2.345 billion to pay things off. With a shortfall that drastic, even the U.S. Treasury and the Canadian governments are waiting for their money, with a $3.34 billion loan and $29 million in interest going not being repaid. The Treasury sent Old Carco a notice of default last month, which strikes us as a waste of a stamp and paper.
And since Old Carco isn't allowed to borrow any more money, there is almost no chance that creditors will be made whole. At this point, as the company tries to unload leftover factories and property, it looks like the best anyone's going to get is pennies on the dollar -- or just fractions of that -- and that could be for the folks first in line. Old Carco is dead, long live Chrysler...
Now that the crime is over, the verdict issued and the sentencing issued, we can look forward to a few months years of the CSI treatment applied to what really happened at Chrysler. The first exhibit is a New York Times piece with Cerberus co-founder Stephen Feinberg, coming off almost as The Man Would Would Be Iacocca. The first quote – "I don't know what we could have done differently. From the day we bought it, we worked hard to improve it" -- is the kind of statement that, no matter how true it is, would likely elicit numerous objections. Yet the issue of whether Cerberus should have bought Chrysler or whether it knew what is was doing is only the second most compelling theme of the Times piece. The real hook is the competing justifications of why Cerberus bought Chrysler. On the one hand, many feel that it was a play to get Chrysler Financial and marry it with GMAC. The other hand, as Feinberg notes more than once, was supposedly holding an American flag – that is, the Cerberus deal was about patriotism and doing what's right for the country. That's a narrative we had never even considered – private equity and The Good of America don't often dine together in our world – but have a read and decide for yourself.
The Wall Street Journal is reporting that Chrysler LLC has retained the services of law firm Jones Day, which specializes in representing companies as they go through the process of filing for Chapter 11 bankruptcy. Chrysler reportedly hired the law firm several weeks ago, anticipating that its counsel may be required if the $7 billion in government bridge loans it has requested are not approved before the end of the year. Sources say that Corrine Ball is the lawyer tasked with handling Chrysler's situation should bankruptcy remain the only option. She has worked on the Dana Corp. bankruptcy, several UAW cases and represented General Motors in its acquisition of Daewoo.
While Chrysler hopes that new testimony hearings this week in front of both the Senate and House of Representatives leads to approval of its request for aid, politicians repeatedly grilled CEO Bob Nardellli on why the automaker's owner, private equity firm Cerberus Capital Management, can't save Chrysler with its own money. The retention of bankruptcy counsel, however, suggests that Cerberus is perfectly willing to let Chrysler enter Chapter 11 bankruptcy rather than infuse it with more of its own cash.
Despite recent rumblings to the contrary, both General Motors and Chrysler claim that they will not be going bankrupt any time soon. Still, as much as the two American automakers would love to quell fears of unsustainable liquidity, questions remain, especially as the pickup market in the United States continues to dwindle. In a note sent out to dealers, Chrysler's Jim Press and Steven Landry say that the automaker will focus its efforts on small cars for the rest of this year, though the current pickings from the automaker's stable seem a bit slim. Chrysler is surely banking on its alliances to bolster its line of small car offerings, which could help to dampen the blow of lost truck profits -- somewhat. General Motors, for its part, has invested heavily into its upcoming Delta platform vehicles, which will include a compact Chevrolet-branded car known as the Cruze as well as the Chevy Volt electric vehicle.
Despite the fact that Chrysler shares are no longer sold on the stock market, rumors regarding the company's financial standing continue to haunt the number three domestic auto manufacturer in America. Last week, rumors regarding the negative cash flow were so rampant, a company spokesperson went out of his way to deny that the automaker was headed towards bankruptcy. Now, despite constant assurance from Chrysler that it's hitting all of its internal goals, the lack of announced future product and credit warnings from major firms such as Merrill Lynch and Fitch Ratings are causing some industry insiders to predict major changes from the automaker. Some analysts even believe that Cerberus is looking to offload or break up the company, allegations that Chrysler vehemently denies.
Because the automaker is privately held, the world will just need to sit back and wait to see how Cerberus' so-called "buy, fix and hold" strategy will work out. Despite what took place back in the '70s, Chrysler shouldn't get its hopes up for much federal assistance. It goes without saying, though, that Chrysler is going to need some major revamped products if it plans to make it in the tough U.S. market much longer.
