Chrysler makes its case for federal funds

Even as automakers were reporting one of the worst sales months in recent years, the CEOs of Chrysler, Ford and GM were making another push for federal help. This time, they were better prepared for the objections and challenges that tripped them up on their last trip.

Like his counterparts at from Dearborn and the Renaissance Center, Bob Nardelli presented an outline of the realities of the current automotive market and provided a closer look at the special challenges facing Chrysler.

Chrysler is asking for a $7 billion secured working capital bridge loan to be approved by the end of the year. Cerberus’ existing senior secured lenders have agreed to work with the company and the federal government to provide mutually satisfactory collateral and priority. The money is needed to cover operating expenses over the next year and to assure suppliers and customers of the company’s performance.

Chrysler’s Plan for Short-Term and Long-Term Viability (the Plan) calls for repayment to begin with a $1 billion payment in 2012 as the market recovers and cash flow improves to sustainable levels. Cerberus and Chrysler would guarantee financial transparency and cooperation with the government.

The Plan outlines a series of programs, either in-process or to be undertaken, to improve its products and meet new federal environmental standards. It also covers and number of steps to be taken to reduce future costs, including executive compensation, bonuses and other issues that have been raised in recent weeks. To start, Nardelli’s total compensation is already $1 per year. He gets no health care, insurance or similar benefits. Top executives also pay 100 percent of their healthcare coverage premiums. Chrysler’s average executive salary is in the 2nd quartile, below competitive compensation levels at similar companies.
In addition, Chrysler did not pay merit salary increases or performance bonuses in 2008 and does not plan to pay them in 2009. Benefits like matching funds for 401(k) plans and employee automobile leases have been suspended or cut altogether.

Although a number of analysts and writers have already written off Chrysler as a viable enterprise, the Plan outlines a profitability strategy for Chrysler as a stand-alone company while admitting the company will continue to seek alliances or consolidations. There is no specific mention of a merger with another automaker, but the possibility is left open. The document highlights the current arrangements with Nissan and Volkswagen.

Most importantly, the Chrysler document outlines the realities involved with filing bankruptcy. Despite the many calls for this action from analysts, politicians and pundits, it is not a viable path for any of the automakers and the Chrysler filing details the reasons this is true. There is no facile, prepackaged bankruptcy because there is no debtor-in-possession financing or other agreements to support such an action. The likely result would either be a costly, long and drawn-out process, like the never-ending Delphi bankruptcy, or a quick descent into liquidation as potential customers shy away from making an expensive, long-term commitment and revenue dries up. The Plan notes that either would have a far-reaching impact and cost the country significantly more than the amount being sought.

Furthermore, the Plan document does provide ammunition for the argument the current state of affairs is not entirely the fault of the automakers. Chrysler had begun an aggressive program of cost cuts, including reducing production, cancelling models, selling off property and significant reductions in employee headcount. Unlike its competitors at Ford and GM, Chrysler had been working from a more pessimistic outlook, bringing capacity in line with the low end of market estimates at the end of 2007. At the time, no one predicted the spiraling gas prices, credit crunch and depth of the recession that have reduced light vehicle sales to levels not seen in many years. In fairness to the automakers, it must be admitted they could not cut capacity and costs at the same pace at which the market collapsed.

Whether the Plan will be sufficient to attract enough support from Congress remains to be seen. It addresses the issues that have been raised and makes a clear case to prefer a bailout to a bankruptcy.