Can Chrysler Be Made Viable with Loans?

NEW YORK/DETROIT (Reuters) – As U.S. lawmakers consider Chrysler’s request for a bridge loan, they will have to ask: Where does the bridge lead?

Accompanied by its larger rivals General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) and Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz), Chrysler LLC, majority-owned by Cerberus Capital Management, is readying a renewed plea for emergency financing from the U.S. government to be unveiled next week.

Chrysler Chief Executive Bob Nardelli told workers in a company-wide message on Wednesday the automaker would provide a restructuring plan that will meet standards set by Democratic lawmakers, who have demanded that the automakers demonstrate their “viability and accountability.”

“Chrysler is changing and will continue to change,” Nardelli said in his note.

But analysts watching Chrysler from the outside and others, who have worked to help the automaker game-plan for its crisis, say the change is most likely to be Chrysler’s disappearance as a stand-alone company.

“I would not be surprised to see some kind of a wrap-up plan for Chrysler or an alliance,” said Pete Hastings, a bond analyst who follows the auto sector at Morgan Keegan.

Patrick Anderson, an analyst with the Anderson Economic Group, said that Chrysler likely will be unable to survive on its own even with the $7 billion in federal aid it is seeking.

“That doesn’t mean Jeep disappears. It doesn’t mean Chrysler dealers disappear. But we don’t see a scenario where we have three independent automakers,” Anderson said.

The latest embarrassment for Chrysler came on Wednesday when former Chrysler owner Daimler AG said Cerberus has demanded more than $7 billion — essentially asking that the German automaker rebate everything Cerberus paid for Chrysler just over a year ago.

Cerberus, which could sue Daimler, says the German automaker weakened Chrysler and withheld vital information about the deal in 2007.

But the revelation that Cerberus sees Chrysler as a damaged asset would seem to undercut Chrysler’s argument that its turnaround plan was on track before the most recent downturn in sales tied to the global credit crisis.

LIFE AFTER “VIABILITY”

The question about what “viability” means comes as the U.S. auto industry teeters on the brink of failure by a collapse in sales, according to analysts and executives.

One person familiar with Chrysler’s financial documents said it would be nearly impossible for the automaker to present itself as a viable company in its current form.

Chrysler’s sales through October were down 26 percent and November results due next week are not expected to show much relief. It has just over $6 billion in cash after burning through $3 billion in the third quarter — before industry-wide auto sales dropped to a 25-year low.

Chrysler needs a minimum of $2.5 billion to fund its operations, including payments to suppliers and dealers, a person with knowledge of the company’s planning has said.

That leaves little margin if U.S. lawmakers balk at the renewed request for aid.

“Both our private equity owner and I believe that while the immediate bridge financing is critical, the long-term solution to the industry’s problems and challenges requires industry consolidation,” Nardelli told Congress at the hearing where each of the auto executives was criticized for flying to Washington on their private jets.

When Nardelli returns to Washington, analysts will look to see whether he reiterates consolidation more forcefully.

For now, the indications are strong that Cerberus is preparing Chrysler for a break-up or sale, people close to the automaker said. The company has taken steps that would make it easier to sell individual brands such as Jeep.

Nardelli has confirmed that Chrysler considered and rejected the prospect of bankruptcy. But it has hired experts to study a range of alternatives, including a spin-off of its remaining engineering operations that could provide vehicle development services for automakers in emerging markets, people familiar with those plans have said.

PRESSURE

In a step that underscores the pressure it faces, it has also asked white-collar workers to take buyouts, including cash payments of up to $75,000, and targeted a reduction of about 25 percent of its professional staff under a voluntary program expiring on Wednesday.

The loss of engineering and planning jobs along with cuts to product development investment have raised questions about Chrysler’s product pipeline beyond 2012, when markets are expected to revive.

Several industry experts expect Chrysler to form alliances with multiple automakers and share costs by partnering on product engineering and development.

But the uncertainty about federal aid is keeping automakers interested in partnering with Chrysler away for now.

“They are waiting to see if Chrysler gets any money; waiting for some certainty,” one person familiar with a foreign automaker interested in an alliance said. The person asked not to be identified because the alliance talks are confidential.

Cerberus had talks that moved toward a deal to merge Chrysler with GM earlier this month, before they fell apart and GM shifted its focus to its own cash crisis.

Cerberus has also had contact with Italy Fiat SpA (FIA.MI: Quote, Profile, Research, Stock Buzz), India’s Tata Motors Ltd. (TAMO.BO: Quote, Profile, Research, Stock Buzz), China’s SAIC Motor Group, South Korea’s Hyundai Motor (005380.KS: Quote, Profile, Research, Stock Buzz) and the Renault-Nissan alliance in a far-reaching but unsuccessful bid to find a buyer for all or part of Chrysler, people familiar with the talks have said.

“The problem for any buyer is likely to be why buy now when you can wait and buy the assets cheaper in bankruptcy,” said Hastings.

By Jui Chakravorty Das and Kevin Krolicki