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Cerberus exchanging all its Chrysler equity to labor, creditors

by David Zatz on

According to a new Automotive News article, Cerberus is planning to give away its entire stake in Chrysler – roughly 80% of the company – to labor and creditors. [Update: Cerberus did not announce whether it would be giving equity solely to the UAW, or to the UAW Employee Beneficiary Trust and to individual autoworkers].

Bush’s loans require Chrysler to provide half of its obligation to the UAW Employee Beneficiary Association trust with equity. In addition, Cerberus has said it would exchange equity for the UAW’s agreement to take immediate severe pay and benefits reductions (the UAW has already agreed to these cutbacks as of the expiration of the current contract). Cerberus is also offering equity to creditors in return for lowering of debt.

As a result, Chrysler would be entirely owned by labor, creditors, and Daimler. It appears that the UAW (including the health-care fund) would have the most equity. The move leaves Cerberus with Chrysler Financial, which is likely to be a strong profit-maker when the economy turns around; the private equity firm has already agreed to invest the next $2 billion in Chrysler Financial profits in Chrysler, LLC. 

Cerberus also noted that it had not invested more in Chrysler because its charter limits how much it can invest in any one organization.

Some questions remain, including whether the CAW or its workers would receive equity, the status of employees in Mexican plants, and whether the UAW or individuals will receive equity in return for wage cuts.

The move should put aside rumors of merging with General Motors and being purchased by a Chinese company. However, because Cerberus will still own Chrysler Financial, it will still have a stake in ensuring Chrysler’s future success. If Chrysler regains status and sales, Chrysler Financial is likely to achieve high profits.

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