Chrysler sale plan challenged again in second day of court hearing

By Rebecca Melvin

New York, May 28 - Counsel for three Indiana funds, objecting to the proposed sale of most of Chrysler LLC's assets into a new company in which Fiat SpA will invest, cross examined witness Robert L. Nardelli, Chrysler chairman and chief executive, for well over four hours at a hearing Thursday at the U.S. Bankruptcy Court for the Southern District of New York.

The examination was prolonged as much by counsel Thomas Lauria's seemingly endless lines of questioning as it was by Nardelli's lack of cooperation in allowing Lauria to draw conclusions from the information exposed by his questioning.

At one point, Lauria of White & Case focused on an e-mail to Nardelli from Capstone's Robert Manzo, in which the Chrysler restructuring advisor updated Nardelli on negotiations between the U.S. Treasury and the first-lien lenders.

In the communication, Manzo told Nardelli that the Treasury was "turning up the heat."

Lauria in turn asked the witness: "Did they ever turn the heat up on you?"

To which, Nardelli responded that, to the contrary, he thought that Chrysler had turned up the heat on Treasury.

Lauria asked incredulously: "By letting them handle the negotiations, you turned the heat up on them?"

Nardelli responded by saying he fervently wanted a deal done.

Lauria and Nardelli also sparred for a couple of minutes regarding whether an e-mail from U.S. Treasury stating "it's over," signaled that further attempts on behalf of Chrysler to negotiate a settlement with the non-consenting first-lien lenders would be futile. Nardelli wouldn't budge on whether it was futile or not.

Nardelli sees sale approval Friday

Nardelli was employed by Cerberus Capital Management before being installed by the private equity firm to his current post in August 2007, and he said he plans to return to his desk at Cerberus as soon as the bankruptcy is over - possibly as soon as Monday.

"When the transaction is completed tomorrow, I will leave the company," he said at Thursday's hearing. He added that some regulatory approvals have not yet been achieved, but that counsel had told him that U.S. antitrust regulatory approval should be in hand soon.

Nardelli testified that in the second half of 2008 Chrysler burned through $6 billion to $7 billion in cash. The ailing automaker asked the U.S. government for $7 billion in November, and on Jan. 2 was given $4 billion by the U.S. Treasury.

In exchange, Chrysler had to come up with a viability plan by Feb. 17, which was ultimately rejected by the federal government.

Since the first tranche in January, the U.S. Treasury has committed $4.9 billion in debtor-in-possession financing, and upon exiting it will provide another $6 billion, of which $2 billion is earmarked for the first-lien lenders, out of a $6.9 billion first-lien debt.

The government is the most important element in the deal, Nardelli agreed in response to Lauria's questioning.

"We had one entity willing to lend us money; they said our plan wasn't viable, and we had to get concessions and get an alliance. We made the best decision on balance to avoid liquidation, as painful as this was. In 38 years, it was the first time I had to go into bankruptcy, and I don't want to get good at it."

Auto industry's 'death spiral'

Nardelli, who came from a post at Home Depot and was a top General Electric manager, described the swift "death spiral" that overcame Chrysler and the U.S. auto industry in 2008.

"Volume just evaporated. In the first half, we had $9 billion-plus in cash. Then the roof fell in, or the bottom fell out; it was almost like someone flipped a switch," Nardelli said.

He said the industry has gone from a car making level of 16 million to 17 million new units in the United States to 10 million, almost overnight.

Going forward, he said Chrysler has used a conservative new unit estimate compared to higher level being used by General Motors.

Under the deal, which will probably be ruled on by bankruptcy judge Arthur Gonzalez on Friday, Cerberus forgave $2 billion, and Fiat, which isn't putting up any cash, is committing technology and production platforms, a contribution Nardelli said is probably worth $8 billion to $10 billion.

A $40 to $50 billion value?

Given that Fiat is also getting an initial 20% of equity in the new company, Lauria asked whether you could extrapolate on that being one-fifth of the value of the company, thereby putting its value at $40 billion to $50 billion.

Nardelli said the value of the equity was to be determined, based on the performance of the new company

Lauria also challenged the proposed deal for the liabilities and assets of little value that will be left behind in the old car company.

"Was it the auto task force that suggested an advantage of this structure is not to have the environmental clean up?" he asked.

Nardelli said no.

Ultimately, Lauria's concern was for the first-lien lenders including his clients, the Indiana State Teachers Retirement Fund, the Indiana State Police Pension Trust, and the Indiana Major Moves Construction Fund, which under the proposed deal will recover $2 billion of a $6.9 billion debt, while other stakeholders like the United Auto Workers have a better recovery.

The UAW, though its retiree health benefits vehicle, will receive a note for $4.6 billion of a $10 billion obligation, negotiated in a 2007 settlement, and a 55% stake in the new company.

Lauria also reviewed some e-mails surrounding a settlement between Chrysler, Cerberus and Daimler, which demerged Chrysler in 2007. The e-mails from Treasury scolded Chrysler for entering into negotiations without prior Treasury approval.

Lauria also established an argument on the record of Nardelli's fiduciary duties.

Chrysler, which will be called Chrysler Group LLC under the new structure, will have most of the government financing forgiven under the current proposed plan.

Chrysler, an Auburn Hills, Mich.-based automotive company, filed for bankruptcy on April 30. Its Chapter 11 case number is 09-50002.

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