I’m slowly working my way through the Begs to Congress of the Big Two and a Half. And I’m struck by the way the Chrysler beg basically argues that it’ll be cheaper for the government to give a loan now.
Chrysler doesn’t say so explicitly, but it is seeking money to carry it until such a time as some other company will buy it.
Chrysler remains focused on developing partnerships, strategic alliances or a consolidation as a fundamental element of its restructuring to expand its product portfolio, generate incremental revenue, and create additional operational synergies related to manufacturing, purchasing and distribution.
[snip]
Further partnership, restructuring and consolidation is required for the industry to be viable in the long-run.
Thus, even though it does present its reorganization plan to prove it is making necessary changes, it never really claims it–Chrysler, as a free-standing entity–will return to viability by itself (in fact, it spends a few sentences bitching about the Daimler takeover).
So it needs to present a case for why the government should bridge it to the point where it can be purchased, rather than let it go into bankruptcy. Again, without saying so explicitly, it suggests the money it would get from the government–$6 billion from the DOE funds intended to retool for more efficient cars, and a $7 billion loan here, for a total of $13 billion–would serve the same bridging function as a Debtor-in-Possession loan that it would need for bankruptcy.
Chrysler believes that the amount of DIP financing that it would need to remain viable even during a relatively short bankruptcy (just one year) would approximate $12 to $15 billion. And, even that estimate presumes that financing remains available for the company’s dealers and customers, which cannot be counted on given current market conditions.
If financing for its dealers is unavailable from traditional sources during the Chapter 11 process (as Chrysler must assume would be the case), then Chrysler would need at least $5 billion of additional DIP financing just to support its dealers, pushing the expected total size of the year-one DIP financing need approximately $17 to $20 billion.
The enormous size of the DIP financing facility that Chrysler would require is due to many factors, including (i) the likelihood that many consumers will shun purchasing vehicles made by a manufacturer that is in chapter 11, thereby starving the company of revenue while it attempts to reorganize; (ii) the extraordinary imperiled financial state of the automotive suppliers will likely leave the Bankruptcy Court with no choice but to approve billions of dollars of payments to many of its suppliers on account of "pre-petition" claims just to keep the suppliers themselves afloat and the assembly lines moving at Chrysler; (iii) in addition, Chrysler expects that many suppliers will eliminate any trade credit during its chapter 11, thereby instantly consuming billions of additional dollars of working capital; and (iv) the incurrence by Chrysler of significant professional fees on account of the bankruptcy proceedings.
Given the current adverse credit markets, we would note [sic] expect DIP financing of such size would be provided by Chrysler’s existing lenders or by any other private source. Accordingly, the DIP would have to be provided by the U.S. Government.
It then sketches out what would happen if, instead of Chapter 11 bankruptcy, Chrysler simply liquidated, including the loss of 193,000 jobs between Chrysler itself and dealerships. It ends by arguing that a $7 billion bridge loan would be cheaper than the $17 to $20 billion it would need for bankruptcy financing or the social costs of liquidation (at this point, it doesn’t mention the $6 billion DOE money).
Management fully recognizes that this is a significant amount of money. However, the Company believes this request is the least costly alternative considering the options we face. it provides the least detrimental effect on human capital and the stimulus necessary to prevent further economic decline, if not outright economic depression.
All of which leaves me with one question. What of the $6 billion DOE loan? Given all the talk about partnerships and consolidation, shouldn’t we taxpayers get some input into what happens with such a consolidation. Shouldn’t we have some guarantee that that $6 billion doesn’t get eaten up by Dongfeng motors, at such a time as it decides to buy Chrysler? What if Chrysler doesn’t get that cash, and some innovative upstart does?