The Betsy

Chrysler: Reshuffle the Corporate Capital Structure?

"Correction is appreciated."???? You just did the blogger/reporter's homework for him. Did he bait you?


On May 03 02:07 PM car_guy wrote:

> You have a number of items incorrect, but you do make some interesting
> points.
>
> First, Fiat is not "paying" $2B for 20% of Chrysler. Fiat is receiving
> their equity stake for specific commitments to share technology,
> distribution network, and to make specific investments to build product
> in the US. Fiat estimates it will spend $2-3B, however, Chrysler
> estimates that it will save $8-10B it would have to spend to develop
> the same technology. This is one of the many things the Cerberus
> bankers learned about the Auto industry AFTER they bought the company
> from Daimler. Chrysler will replace all of their mid-size & small
> cars & trucks (B, C, D platforms) with models based on Fiat designs
> and produce new very small cars (A platform) from Fiat designs &
> engines. Chrysler must have these platforms & engines to meet
> new US CAFE standards, even if gas stays cheap for the long term.
> Daimler would have provided this technology with the DCX model. With
> Cerberus Chrysler tried to farm it out to partners (Chery, Nissan,
> etc) and was unsuccessful (only Nissan came to fruition and the strong
> Yen broke that model). Chrysler's only options were outright aquisition,
> which the credit crisis made impossible, or a Renault/Nissan style
> alliance which is what they accomplish w/Fiat.
> The terms for Fiat earning the additional 15% are defined in the
> press release and are the result of specific milestone achievement
> (build 40mpg car in US, build new small engine for Chrysler in US,
> sell Chrysler vehicles w/global network). Tooling plants to produce
> the car & engine will require cash from Fiat, at least $1-2B.
> What Fiat gets from Chrysler is hardly mutual. Aside from the US
> sales distribution network, which is really cost avoidance on their
> part, they get access to Chrysler's new V6 engine and SUV platforms
> which are helpful, but not mission critical. Chrysler can't survive
> w/o Fiat because they can't meet the 2020 CAFE standards without
> the $8-10B investment even if gas stays cheap in the long run. Fiat
> wants the Chrysler alliance because Marchione believes that a global
> Auto OEM will need to produce over 5 million vehicles/year to survive
> in the future. While this is logical, only Toyota, GM, VW, Ford,
> and Renault/Nissan achieved this goal in 2007 which would provide
> Fiat with plenty of partners if this theory becomes more real.<br/>Cerberus
> gets to keep Chrysler Financial (which they admit they ran into the
> ground in WSJ) and Chrysler Real Estate which has value, but how
> much is not clear. Cerberus is also using Chrysler to be GMAC's (not
> GMCC) captive Auto OEM since, due to more brilliance on their part,
> GMAC is no longer tied to GM and suddenly needs to compete for business.
> They don't walk away empty handed, but this obviously was not the
> ending they intended. I agree, no tears for them.
> The US taxpayer gets 8% (Canadian get 2%) for their initial $4.5B
> loan ($1B from Canada). The return is more like 20%. The DIP funding
> and approx $11B to get out of C11 will be loans that will have to
> be repaid.
> The UAW is not really getting 55%. Classifying them as an unsecured
> debtor may be legally accurate, but is not an accurate description
> of the liability they hold for Chrysler. When Cerberus bought their
> 80.1% of Chrysler from Daimler, they took on $18B of health care
> liability. The UAW took over this liability for approx 0.70/$1 when
> the VEBA was created in 2007. The $10B was the remaining cash owed
> to the VEBA to fund the $18B liability. Counting the approx $2.5B
> in cash already deposited into the VEBA, the UAW's liability is around
> $15.5B so using your numbers they recover approx 30%. Same as the
> bond holders, but they can't simply write off their losses. The UAW
> is still on the hook for the health care costs and is going to be
> struggling with this for years to come.
> You are right on the money with your assessment of how this situation
> was impacted by CDS. Based on their actions, it is reasonable to
> assume the hold outs were fully hedged and drove the C11 to cash
> out their positions. This is no different than buying a building
> and burning it down for the insurance money. You would think that
> the companies issuing the CDS would be smart enough to protect against
> this behavior or at least void the claim. You propose that the hedged
> owner transfers their voting rights to the insurer, which makes sense.
> I propose that a simpler solution is to simply call this what it
> is, insurance fraud, and prosecute accordingly.