Financial Management
-The Chrysler Prepack P517
MA080107
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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%