The bell may toll for Chrysler … next week

From the NYT, we learn that they are being pushed to a Chapter 11 filing. This is needed, in order to cause a break on some of the really bad contracts and other business elements they have agreed to over the years.

Chrysler is a consumer of HPC products. Rumor has it a large (effectively free/risk free) cluster was provided by one of the tier 1s in the last few months.

Chrysler has been hammered by the economic downturn, and the effective absence of credit in the market. Without credit, most consumers won’t buy cars.

Chryslers’ Jeeps are my favorite … my wife and I each have one.

But the market has been unkind to Chryslers’ other offerings, and what had been a company being slowly drawn and quartered by bad agreements on labor and other costs, has turned into a steep plumment of minimal sales, and no one willing to lend them operational capital until they can get sales jumpstarted again.

The big issue is that the government is basically now trying to enforce some draconian terms on secured lenders.

The only major question that remains unresolved is what happens to Chrysler’s lenders, who hold $6.9 billion in company debt. The government’s most recent offer, presented Wednesday, would give the company’s lenders about 22 cents on the dollar, or $1.5 billion, and a 5 percent equity stake in a reorganized Chrysler. Earlier this week, a steering committee of the lenders proposed that they receive 65 cents on the dollar, or $4.5 billion, and a 40 percent equity stake.

While you, the little guy, may be cheering this whalloping … just remember that we see that loss in terms of losses on the balance sheets of the lenders, whom our collective retirement 401ks might hold. And if this is BoA, or Wells Fargo, or … then the rest of us will be paying for it. So hold your cheering. The only one going to get the shaft in the end, will be us.

This of course, assumes that the lenders will go along with this. I am betting … not so much.

If no agreement is reached between the government and Chrysler’s lenders, a nasty legal fight could emerge in bankruptcy. The creditors’ claims are backed by most of the company’s collateral, including plants, brands and equipment, and the senior lenders will argue that they have first claim on those assets, even over and above the government’s debt.

Yup. The creditors, who hold the collateral notes, could force a liquidation.

Which, I think may be likely, and sadly, a better gambit for them. They are being asked to swallow a 78% reduction. They may gamble that the courts will do better for them.

And Fiat, waiting in the wings, may wind up getting a better deal by waiting for this implosion, and then just buying the parts it wants on fire sale. Rather than full price.

While I hate to think that my Jeeps will have no followon I can purchase, I think this is a probable outcome. And from the HPC perspective, all the smaller outfits running simulations for Chrysler, are quite likely to be doing less simulation.

This is a mess, and there will be no real winners. It looks like the winners will be those who lose the least.

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