Chrysler to file for bankruptcy

Chrysler LLC will file for Chapter 11 bankruptcy on Thursday after talks to restructure its debt with bondholders collapsed, a U.S. government official said.

Chrysler failed to gain the bondholder support it needed to move forward with a restructuring and avoid the first-ever bankruptcy filing by a major U.S. automaker.

The Chapter 11 filing, which sources said would be done in U.S. Bankruptcy Court in Manhattan, will send shockwaves through the entire auto industry -- including Chrysler's rivals, suppliers, dealers and the many hundreds of thousands who rely on the industry for their livelihoods.

A statement from President Barack Obama on Chrysler's situation and the auto industry is scheduled for noon EDT.

The filing does not preclude a deal with Fiat. Chrysler has been seeking a rescue deal from the Italian automaker while also trying to finalize a debt forgiveness agreement from its lenders.

Before the bankruptcy news, signals about the discussions with Fiat were mixed. The Italian newspaper Corriere Della Serra reported Thursday morning that a deal had been signed, but Fiat later denied this.

The debt restructuring talks have been spearheaded by the Obama administration's autos task force and former investment banker Steve Rattner.

In a bid to win over three fund firms that had spurned an offer to accept $2 billion in cash in exchange for writing off all of Chrysler's $6.9 billion in secured debt, U.S. officials sweetened the terms by throwing in another $250 million, people familiar with those discussions said.

About 45 financial institutions hold Chrysler's secured debt.

In an earlier memo to employees obtained by Reuters, Chrysler Chief Executive Robert Nardelli had said reaching an agreement with lenders was the company's main focus.

Chrysler, majority-owned by Cerberus Capital Group , is among the car industry's laggards, but its plight reflects a slump in demand facing an industry whose $2.6 trillion annual revenue is equivalent to the GDP of France and which employs over 9 million people.

Bankruptcy marks another key moment for the struggling American manufacturing sector.

In 1925, Walter P. Chrysler established Chrysler Corp. Three years later, the company laid the cornerstone for the Chrysler Building, briefly the world's tallest building and still an unmistakable part of the Manhattan skyline.

On Wednesday, Obama said concessions by Chrysler's unions and its major bank lenders had made him more hopeful than a month ago that the struggling automaker could be made viable.

The automaker has won cost-cutting concessions from its unions in the United States and Canada and was on the brink of closing its deal with Fiat on Wednesday, a person involved in those negotiations told Reuters.

Putting the two car producers together would give the combined group annual sales of some 4.16 million vehicles, making it equal with Hyundai and behind Toyota, General Motors, Volkswagen and Ford.

Fiat Chief Executive Sergio Marchionne thinks a carmaker needs to produce at least 5.5 million cars a year to survive.

[Source: By Poornima Gupta and Jeff Mason, Reuters, Detroit and Washington, 30Apr09]

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