Post bailout, Chrysler still seen at risk

DETROIT Mon Dec 22, 2008 9:56pm EST

A Chrysler sign is seen on the front of Chrysler's Detroit Axle Plant in Detroit, Michigan December 12, 2008. REUTERS/Rebecca Cook

A Chrysler sign is seen on the front of Chrysler's Detroit Axle Plant in Detroit, Michigan December 12, 2008.

Credit: Reuters/Rebecca Cook

DETROIT (Reuters) - With sales falling off the cliff and production halted at all 30 of its U.S. plants for a month, Chrysler LLC is on a money-losing streak without a definite end in sight.

Even the $4 billion emergency federal bailout -- its second in 28 years -- may not be enough to help the company survive into the next decade.

And the aid would more likely serve to prepare the No. 3 U.S. automaker, seen as the weakest of the Detroit three, for an orderly winding down of its assets, analysts said.

Chrysler, acquired by private equity group Cerberus Capital Management in August 2007, has scrambled to shore up liquidity over the past year with its cash falling close to the minimum $2.5 billion needed for operations in recent months.

The company has cut over 8,000 jobs this year, throttled back spending on product development and is not building any cars or trucks in North America for a month starting December 19-- which will directly hit revenue because automakers book sales when vehicles are shipped to dealers.

"It's pretty clear that they're still going to lose cash, maybe a lot of cash until March," said Ed Altman, professor of finance at New York University's Stern School of Business. "This is going to be a key issue that we're going to revisit ... the bankruptcy possibility will again be at the front, center of the discussions."

Altman said it will be extremely difficult for Chrysler to survive and doubted that the company will exist in its current form beyond six months.

Underscoring the challenge faced by the company, Standard & Poor's on Monday lowered its corporate credit rating to "CC," a junk status that is just two notches above default.

S&P analyst Robert Schulz said the company's various challenges keep bankruptcy risk high.

The federal bailout money offered to Chrysler and larger rival General Motors Corp came with the condition that the automakers undertake a wrenching restructuring that includes massive cuts in labor costs, a two-thirds reduction in debt that involves convincing creditors to swap debt for equity and possible shareholder losses.

But Chrysler has not yet revealed how it plans to meet the government restructuring targets in its three-month window.

The only clue was provided by owner Cerberus, which said on Friday it would contribute its equity in the company to labor and creditors as currency to facilitate the revamp, raising further questions about its continued investment in Chrysler.

Cerberus, which owns 80.1 percent of Chrysler, has been talking to a number of automakers in recent months to either sell Chrysler or forge a partnership.

The private equity group held talks with GM about selling Chrysler, but the difficulty in securing funding for a deal at a time when credit was tight and auto sales were in free-fall put an end to those discussions in November.

NEXT THREE MONTHS CRITICAL

JP Morgan analyst Himanshu Patel said Friday's $17.5 billion bailout to GM and Chrysler does not mean bankruptcy risk for all of the three Detroit automakers has been avoided.

Patel said some "sort of orderly down-stepping of Chrysler" may be in the works, citing a number of "clues" including the fact that Chrysler was given only $4 billion even though it asked for $7 billion. GM's request was fully granted.

The other Detroit carmaker, Ford, has not sought any loans from the government, saying it has enough near-term liquidity. However, Ford is seeking a $9 billion credit line to be tapped if needed.

Barclays Capital analyst Brian Johnson said the next three months would be a critical period for Chrysler as many in Congress have doubts about the company's long-term viability and were averse to extend more credit to an automaker owned by a private equity group.

"The option that creates the most long-term value for GM with regards to Chrysler would be a prepackaged Chrysler bankruptcy followed by an asset sale of Jeep, minivans and the Mopar accessories business to GM," he said.

(Reporting by Poornima Gupta and Soyoung Kim; Editing by Patrick Fitzgibbons, Gary Hill)

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