The US government has told Cerberus Capital Management-backed Chrysler it needs to find a partner to survive and will provide the company with working capital for 30 days to reach a partnership deal with Italy’s Fiat SpA.
If an agreement is not reached within the 30 days, the government will cut off funding to the company, but if a deal is reached, the US will extend another $6 billion to Chrysler, which has already received $5.5 billion in rescue financing.
“[The task force] has concluded that the Chrysler plan is not likely to lead to viability on a standalone basis, and that Chrysler must seek a partner in order to achieve the scale and other important attributes it needs to be successful in the global automotive industry,” the task force wrote in its report.
Chrysler and General Motors submitted restructuring plans in February as part of a rescue package under which the companies received a combined total of $17.4 billion. The companies have requested another $22 billion from the government.
US President Barack Obama’s auto industry task force reviewed the restructuring plans and determined they do not go far enough to help fix the problems both companies face. The best chance of success for both companies may lie in using bankruptcy “in a quick and surgical way” to restructure, the task force said.
Chrysler and Cerberus have been in talks with Italy’s Fiat SpA on a partnership, and the government referenced an alliance between the companies as Chrysler’s best hope. After negotiations with the government, Fiat is prepared to transfer technology to Chrysler and has committed to building fuel efficient cars and engines in US factories, the task force said.
“Chrysler has reached an understanding with Fiat that could be the basis of a path to viability,” the task force wrote. “There are substantial hurdles to overcome before this deal becomes a reality.”
The report noted several weaknesses that will prevent Chrysler from surviving as a stand-alone company, including the company’s “limited scale in an increasingly capital-intensive global business, the inferior quality of its existing product portfolio and its heavy truck mix”.
Cerberus has struggled with Chrysler since it acquired the automaker in 2007 for $7.4 billion. The firm has pledged to donate its equity stake in Chrysler to help facilitate the government bailout. Cerberus also said it would use the “first $2 billion of proceeds” from its financing arm Chrysler Financial to bolster the automotive operations of Chrysler.
Cerberus has been under pressure to contribute its own funds to Chrysler to help prop up the company. The firm has said it is limited in how much it can contribute to Chrysler because of rules governing its investment funds.
“Cerberus is not a deposit-taking institution that can act as an ATM machine for its portfolio companies,” the firm said in a statement released in December. “Cerberus does not have the liquidity to fund the loans requested by Chrysler, and … could not do so even if it had such liquidity at its disposal.”
Recently, Republican Senator Chuck Grassley told Reuters Cerberus should put more money into Chrysler.
“It’s foolhardy of Cerberus, when they have got such a stake in Chrysler, to think that they can hide behind private equity,” Grassley told Reuters in an interview. “Do they believe in Chrysler or don’t they believe in Chrysler? If they believe in it, they ought to be helping.”