Chrysler's Bankruptcy Deals Blow to Affiliates

By ALEX P. KELLOGG and JEFF BENNETT

Pressure mounted on Chrysler LLC as the auto maker was forced to idle four plants and its dealers scrambled to find new sources of credit a day after the company filed for Chapter 11 bankruptcy protection.

The developments sparked fresh questions about Chrysler's prospects for quickly exiting from bankruptcy protection and about the web of suppliers and dealers that are linked to the company. The plants were idled after suppliers halted shipments, while dealers were squeezed when Chrysler Financial stopped providing cut-rate loans.

Fiat SpA Chief Executive Sergio Marchionne, seen as likely to take the helm of a restructured Chrysler, is counting on the bankruptcy process to move swiftly, allowing him to plunge into restructuring the troubled automaker. Over the next month, Mr. Marchionne will begin touring Chrysler plants and sifting through its other operations.

Fiat, which is partnering with Chrysler, is likely to use Chrysler's journey through Chapter 11 to slim its bloated dealership network, according to a person familiar with the matter. In bankruptcy, Fiat can press dealerships that have underperformed to renegotiate or terminate their contracts.

 

For several months Chrysler dealers have been feeling the strain of slumping sales. On Friday, Chrysler reported sales of cars and light trucks fell 48% in April to 76,682.

However, Fiat faces a bumpy road. Gaining Chrysler's extensive sales network is a key attraction for the Italian company, and Mr. Marchionne does not want Fiat's re-entry to the U.S. market after nearly three decades to be marred by a messy court battle.

A Fiat spokesman could not be reached for comment Friday, a holiday in Europe.

Already-strained parts suppliers, hurt by Detroit's plummeting sales, face a squeeze of their own. In court filings, Chrysler warned that many parts makers could follow the company into Chapter 11 if its proceedings drag on. Its largest unsecured creditor is Ohio Module Manufacturing Co., a supplier that is owed $70.3 million. Chrysler in court Friday asked that it be allowed to continue to pay its employees and suppliers.

"Without a clear timeline for when the [bankruptcy] situation will end and production will resume, I believe we will see massive suppliers bankruptcies that will stop Chrysler from resuming production," Chrysler's procurement officer, Scott Garberding, said in a statement filed with the bankruptcy court Thursday.

Chrysler was preparing to shut down all of its vehicle assembly plants for 60 days on Monday. But on Friday two plants in the U.S. and two in Canada were forced to cease production because a few suppliers stopped shipping parts or materials.

Officials from the Obama administration's auto task force cautioned that there was no reason that suppliers should be hesitating over shipments to Chrysler or getting worried about payments.

"It is the company's intentions to continue to pay suppliers in the ordinary course," said one official. "This company will operate in the ordinary course throughout the bankruptcy process."

Chrysler is being given access to $1.3 billion in federal financing to keep it going during the bankruptcy process. And afterwards, the U.S. government is prepared to offer an additional $4.7 billion in loans.

Across the country dealers Friday were scrambling to line up new banks to provide auto loans for buyers after the company's ailing lending partner, Chrysler Financial, stopped providing loans with subsidized interest rates such as 0% deals.

Chrysler Financial is still offering auto loans to buyers purchasing vehicles from Chrysler, said the lending company's chief executive, Tom Gilman. However, he acknowledged his company isn't offering the lowest rates available. "Our rates haven't been competitive for some time because our costs are so high," he said.

David Kelleher, owner of one Dodge store and a Chrysler-Jeep franchise in the Philadelphia area, said he was working on paper work on Friday to be able to get customers auto loans from GMAC LLC to make up for the loss of loans from Chrysler Financial.

"Having those partners at Chrysler Financial was very, very important to the dealer body," Mr. Kelleher said. In the past Chrysler Financial worked closely with dealers to help them sell cars, although it had become less so in recent months as it tightened up credit terms and approved fewer and fewer loans.

Associated Press

A customer outside a Chrysler dealer in Oakland, Calif., on Thursday. The auto maker reported sales of cars and light trucks fell 48% to 76,682 in April.

Mr. Kelleher added he's concerned about working with GMAC because it is affiliated with Chrysler's competitor, General Motors Corp. "It's going to be a real challenge to get GMAC to act on behalf of Chrysler," he said. "It's very difficult if a finance arm is not aligned with you."

GMAC is prepared to handle business from Chrysler customers and dealers, and will handle their business the same as GM customers, a GMAC spokeswoman said. Cerberus Capital Management LP, Chrysler's former parent, has sizable stakes in GMAC and Chrysler Financial.

On Thursday President Barack Obama expressed optimism when he announced Chrysler would seek bankruptcy protection after his administration's auto task force failed to reach a debt-reduction deal with about half of Chrysler's 46 secured lenders.

"The necessary steps have been taken to give one of America's most storied auto makers, Chrysler, a new lease on life," Mr. Obama said.

But bankruptcy adds a new element of risk to the government-led restructuring of Chrysler. Since Chrysler is halting production, shipments of parts and materials from suppliers to its 12 North American assembly plants will cease, putting jobs at suppliers as well as at Chrysler on the line.

"When Chrysler doesn't run, we don't run," said a person at Ohio Module who identified himself as a human-resources manager at the company but declined to give his name.

Other officials at Ohio Module, which builds chassis for Jeep Wranglers and was spun off of Chrysler in 2006, couldn't be reached.

Chrysler's Conner Ave. assembly plant, which builds the Dodge Viper, has been stopped by interruptions in its parts supply for the last three weeks, said Chris Vitale, a worker at the plant.

A Chrysler spokeswoman said she didn't know the reason production was suspended at the Conner Ave. plant.

A parts shortage will not only affect production at Chrysler but would ripple through the industry, which could create some disruption for other auto producers.

"We're all interconnected, so we're evaluating it right now," said Edward Miller, a spokesman for American Honda Motor Co. Honda buys parts from 525 U.S. suppliers. But Mr. Miller notes those companies all buy parts from thousands of other producers as well, some of which could also be forced out of business. "We're anticipating there will be some impact," he said.

The bankruptcy was on the minds of the few customers who were in Chrysler stores on Friday.

The Chrysler showroom of Boardwalk Auto Center in Redwood City, Calif., had a lone customer, Ken Hopkins, who was eying a ruby red PT Cruiser to replace his 2001 model. The retired technology consultant said Chrysler's bankruptcy was making him think twice about a purchase. "You want to have the assurance that they'll have follow-up service," he said. Still, Mr. Hopkins said he hoped to pick up a bargain because of the bankruptcy filing.

Many dealers said they have already been contacted by GMAC and are lining up credit through the company, or are already able to get customers car loans from other banks.

Brian Kelly, owner of Kelly Jeep Chrysler, in Lynnfield, Mass., a Boston suburb, said his dealership plans to arrange financing through local banks. "We have long-standing relationships with banks that do this," he said. "That is primarily going to be our biggest option."

For this weekend, his dealership is advertising a "new cars at used car prices" promotion. "We want the world to know that this makes it a buyers' market," he said. "We are just pointing it out and giving people the opportunity to take advantage."