Financial Management -The Chrysler Prepack P517 MA 莊涵涵

Bankruptcy Protection Liquidation – A appointed trustee oversee the liquidation of the firm’s assets through an auction- to pay creditors Reorganization – To have an opportunity to propose a reorganization plan – Creditors must vote to accept the plan- approved by the bankruptcy court – Creditors may receive new debt or equity securities

Direct Costs of Bankruptcy To company: Fees to outside professionals – Accounting experts, consultants, appraisers,auctioneers.etc To creditors: Fees to seperate legal representation and professional advice-to value their claims in a proposed reorganization

The effect of Direct Costs Reduce the value of the assets that the firm’s creditors will ultimately receive E.g. – United Airlines paid about 8.6 million per month for legal and professional services – Enron paid 750 million and the reorganization costs approach 10% of the value of assets – Average direct cost are about 3% to 4% of the pre-bankruptcy market value of total assets

Methods to reduce Direct Costs Workout – For avoiding a declaration of bankruptcy,a firm in finaicial distress negotiates directly with its creditors to reorganize Prepackaged bankruptcy – A firm first develops a reorganization plan with the agreement of its main creditors before the company files its petition for bankruptcy-implement the plan(pressure any creditors who attempt to hold out for better terms)

Methods to reduce Direct Costs Prepackaged bankruptcy – The idea behind a prepackaged bankruptcy plan is to shorten and simplify the bankruptcy process in order to save the company money in legal and accounting fees, as well as the amount of time spent in bankruptcy protection. The sooner the company can emerge from bankruptcy, the sooner it can implement its reorganization and return to generating revenues from its core operations

The Chrysler Prepack In November 2008,CEO Robert Nardelli : Without a government bailout, a Chrysler bankruptcy was inevitable -but Congress was not convinced In December 2008,President Bush bailed out Chrysler with funds from the “Troubled Asset Relief Program(TARP)”-8 billion in debt financing

The Chrysler Prepack Customer concerns about Chrysler’s future- In March 2009,President Obama took the unprecedented step of guaranteeing warranties on all new Chrysler cars On April 30,2009, Chrysler declared bankruptcy as part of a government-orchestrated prepack After 41 days, Chrysler emerged from bankruptcy as a Fiat-run (20%),UAW (55%),U.S. Treasury (8%),Canada government (2%)

The effect of using Prepackaged bankruptcy Company(41 days) – avoided lots of direct costs following the prepack agreement Debt holders(under government pressure) – Banks already received TARP,so they accepted a deal that put the claims of unsecured creditors(UAW) ahead of their more senior claims As the cooperation among investors,government intervention,avoided a long and costly BK

The present situation of Chysler Fiat took over Chrysler The Q1(2011) NI is 116 million, the operating revenue is 13.1 billion The sales increased 18%