Chrysler, Fiat: Back from the Brink?
Story from Business Week

An agreement with big banks may keep Chrysler out of bankruptcy court, but several smaller debt holders remain to be wooed

Italian automaker Fiat (FIA.MI) moved much closer to a deal with Chrysler on Apr. 28 that will blend the two companies' operations and likely keep Chrysler out of bankruptcy court.

The breakthrough came when a committee representing bank and private equity lenders that hold 75% of Chrysler's $6.9 billion in debt agreed with the White House auto industry task force and Chrysler owner Cerberus Capital Partners to take just $2 billion of what it's owed, along with 5% of the company's equity.

The automaker is still not safe from Chapter 11, though. A group of smaller banks that collectively hold 25% of the debt also need to be brought into line. The White House is looking for at least 90% participation by the lending banks before providing more government financing that will keep the automaker out of bankruptcy. Unless the White House extends its deadline, the wooing process needs to conclude by Apr. 30.

One executive working with the debt holders says that smaller banks are complaining that the big banks, who were recipients of Troubled Asset Relief Program (TARP) bailout funds, succumbed to political pressure, striking a weaker deal than what they had been negotiating for.
Better Terms for the UAW?

On Mar. 30, President Obama said his task force concluded that Chrysler could not continue as an independent entity, and that the U.S. Treasury would not extend any more loans to Chrysler past that Apr. 30 deadline unless it struck a deal with another automaker, its unions, and lenders, and showed financial viability.

Debt holders have been complaining that the United Auto Workers were getting much better terms from the White House, and they have been holding out for a better deal. On Sunday, the UAW struck an agreement that gives the union's Voluntary Employee Benefit Assn. (VEBA) health-care trust fund $4.5 billion in Chrysler stock, or about 55% of the fund's total financial backing. A VEBA representative will also hold a seat on Chrysler's board of directors.

A Treasury official indicated that the ongoing negotiations definitely boosted the odds in favor of Chrysler steering clear of bankruptcy court. "The agreement from Chrysler's principal banks is an exceptional accomplishment in line with the President's firm commitment that all stakeholders sacrifice to make this deal succeed," the official said.

While Obama Administration officials have talked tough about forcing both Chrysler and General Motors (GM) into bankruptcy in the last month, there is also a desire to avoid it. "Actual Chapter 11 brings a lot of unknowns for how the consumer will react," says independent marketing consultant Dennis Keene. "Especially now, having hit what we think is the bottom of sales and consumer confidence, Chapter 11 would be a setback for everyone."
Benefits Lost

The UAW has agreed to cuts in wages, overtime pay opportunities, vacation days, and to the elimination of the so-called Jobs Bank, which continued to pay workers after they were terminated. Retirees will also lose their dental and vision insurance coverage. UAW President Ron Gettelfinger couldn't be reached for comment on Apr. 28. But in a letter to members he said, "We fought to maintain our wages, our health care, and our jobs. … In the face of adversity, we secured new product guarantees, and we negotiated new opportunities for UAW involvement in future business decisions."

Part of the agreements call for Fiat to build a small car in the U.S. with union workers. They also specify engines that will be made available to Chrysler and built in the U.S., assuring that some future Chrysler models will continue to be built domestically.

"The UAW is under a great deal of pressure, but the deal they struck was very necessary," said Canadian Auto Workers President Ken Lewenza. The CAW cut a deal with Chrysler last weekend. "The unions have done a great deal to make this deal happen."
Envisioning a New Chrysler

What Chrysler looks like after Fiat begins retooling the company remains to be seen. The Jeep brand is widely considered to be the most valuable asset. Part of the plan calls for Fiat to distribute Jeep models through its European and South American network, which could quickly enhance the company's sales.

The two companies also have been exploring whether they can take some existing Fiat vehicles and rapidly modify them to be sold as Dodges and Chryslers in the U.S.

Of course, all those plans depend on Chrysler, its banks, and the White House crossing the finish line.

Honda Taps Sony to Ramp Up Its Ad Strategy

In an unprecedented move for Web advertising, Honda is buying all the online and mobile advertising space sold by Sony Pictures Television for a week starting Wednesday to promote the launch of its Honda Fit.

While it's not uncommon for advertisers to buy all the available ad space tied to a particular TV show or single Web site to drown out the competition, Honda's half-million dollar deal with Sony takes that strategy a step further by extending across all Sony's mobile and online entertainment and third-party sites in the U.S.

Marketers have long been concerned about breaking through the crush of advertising on television. Now, with marketers following consumers online in droves, advertising clutter is becoming a major issue on the Web as well. The average Web surfer is exposed to thousands of online ads a month -- and remembers very few of them.

"The fact is, that like any part of the media landscape, it is harder and harder to break through," says Edmund Purcell, vice president and interactive management supervisor at RPA, American Honda's advertising agency. "We are not just throwing up a banner that could be passed over."

The Honda Fit campaign, aimed at metropolitan people who like small, fuel-efficient cars, includes ads on Sony Pictures' site Crackle, where viewers can share user-generated video. Ads will also appear on sites and music videos linked to Sony's music label Sony BMG, and on mobile networks Sony partners with, including wireless carriers Sprint and AT&T.

Ads will be tied to Sony-created digital programming across third-party sites as well, including social networking sites MySpace and Facebook; video sites YouTube and Hulu; and the virtual world Gaia Online.

Sony's digital programming includes minisodes, which are TV shows cut down to five-minute episodes for the Web and mobile; CSpots, which are original short-form videos that appear online and mobile; and Sony Pix, which are full-length films from the studio's library available via online and mobile.

Consumers often have a hard time remembering standard digital display ads, but a marketer can make more of an impact if they sponsor all the advertising space on a particular site, says Alan Gould, co-CEO at IAG Research, a Nielsen firm that tracks the performance of advertising. With online videos, if one marketer is the sole sponsor of the content, the impact of the ad can be stronger than TV, he adds. "It's more challenging to get your online display ads noticed in the first place, but once you do capture the site visitor's attention, the branding can be very powerful if you own the environment," says Mr. Gould.

Sony says it plans to pursue the Honda model with other advertisers in the future. "It's a perfect fit for what branded messaging on the Internet could be, or should be," says Amy Carney, president of ad sales at Sony Pictures Television, which sells all advertising connected to Sony's television, movie and music content across its own and third-party partner sites.

It's the not the first time Honda has tapped Sony: previous campaigns have included a contest on Crackle. Honda's latest deal with Sony is part of a broader Honda Fit promotion that includes TV ads, which started appearing at the end of September, an animated game, a Web site and a promotion with MTV Web sites set for early 2009.
By: Emily Steel
Wall Street Journal; October 8, 2008

U.S. Auto Makers Seek Bailout for Bad Car Loans

Relief Plan, Part of Original Wall Street Rescue Package, Could Free Up Loans for Car Dealers as Well as Their Customers

As Congress revises a bailout plan for Wall Street, U.S. auto companies hope the new package will stem a growing credit crisis that threatens to further crimp their industry.

The original $700 billion Wall Street deal, which was rejected by the House on Monday, included a substantial bailout for auto lenders. These companies hold a stable of bad auto loans that could shrink in value and hurt both the lenders and the vehicle makers. This bailout would have been separate from the $25 billion in low-cost loans for U.S. auto makers that President Bush signed into law Tuesday.

Unsold Ford pickup trucks sit at a dealership in Centennial, Colo. Ford is among big auto makers seeking a bailout for car loans that went bad.

Because of constrained capital, GMAC LLC, partially owned by General Motors Corp.; Ford Motor Credit; and Chrysler Financial, which finances Chrysler LLC's vehicles, have tightened lending standards in recent months. The tightening happened just as the lenders decided to pull out of the risky practice of leasing vehicles, which had long represented about 20% of new-vehicle financing arrangements. The combination of tougher-to-get loans and absence of leasing stung auto makers during the summer selling season.

A Washington bailout of bad car loans could loosen the flow of financing for potential car buyers and spark demand for new cars and trucks. It likely would free up funds that could be invested in securities backed by auto loans, bringing down borrowing costs for auto lenders.

In August, tight credit caused General Motors to lose sales of roughly 10,000 to 12,000 vehicles, the car maker said. When extrapolated across the entire U.S. industry, that was the equivalent of 40,000 lost sales, or about $1 billion in revenue.

The growing credit crunch in the auto industry is expected to have wreaked havoc on September vehicle sales, which will be reported Wednesday. Research firm J.D. Power & Associates expects a 26% volume decline compared with the same month in 2007.

"There are still quite a few deals getting done, but they require a lot more work and a lot more back-and-forth between the bank and the dealer," said Earl Hesterberg, chief executive of Houston-based dealer chain Group 1 Automotive Inc. "It's become significantly more difficult, particularly in the last month."

John Bergstrom, owner of the Bergstrom Automotive Group dealership chain in Wisconsin, said the buyers having the most trouble are those who are trading in a car they have owned for just a few years. Because they don't have much equity in their vehicle, or may even owe more on the loan than the car is worth, banks increasingly are requiring these buyers to produce hefty down payments.

"The challenge is affordability," Mr. Bergstrom said. "People's bills are getting higher, and then they're squeezed on gasoline and they're squeezed on milk and so forth. When they look at a car, they say they can't really afford them."

The tightening also has hit dealers as the car makers' finance arms raise the cost of the "floor plan" credit they offer dealers to buy cars for their inventory. Dealers typically repay lenders for these loans as each vehicle is sold.

Existing bonds made up of floor-plan loans of the three auto-finance arms total $25.8 billion, according to data provider ABSNet. Ford Motor Credit and GMAC lead with $12.7 billion and $10.6 billion, respectively. Both companies have had unprecedented trouble attracting investors in floor-plan assets in recent months, people familiar with the matter have said.

That has prompted the finance companies to get tougher on dealers with weak finances, raising their rates and fees for some. This makes it costlier for dealers to buy cars, eroding their margins. In addition, dealer inventories are getting leaner, meaning potential car buyers have fewer options to choose from.

And since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales. Last week, one of GM's largest Chevrolet dealers, Bill Heard Enterprises, closed all 14 of its dealerships after GMAC canceled the dealer's credit line.

By: Aparajita Saha-Bubna
Wall Street Journal; October 1, 2008

Chrysler Seeks Lift From New Dodge Ram Pickup

Auto Maker Hopes to Drive Cash Flow With Key Launch

A year ago, Cerberus Capital Management LP made an about $7 billion bet that it could turn around ailing Chrysler LLC. Now, with the auto maker's sales in a deep slump, Cerberus's best chance for salvaging the bet is riding on a single vehicle: the new Dodge Ram pickup.

The fully redesigned truck, which started arriving in dealerships this month, is Chrysler's biggest selling vehicle and its most profitable model. If the new Ram is a hit, it could lift Chrysler's revenue and move the company much closer to ending its operational losses and generating positive cash flow.

People familiar with the matter said Cerberus has planned on incoming cash to start exceeding its monthly expenses some time in 2009 -- the Ram's first full year in the market.

After a speech here Wednesday, Chrysler Vice Chairman Jim Press acknowledged the new pickup is a key product and its most important launch this year. But he insisted that Chrysler's chance of generating positive cash flow next year isn't "dependent on one model."

Mr. Press declined to predict when Chrysler's cash flow would turn positive. Cerberus has been slashing the Auburn Hills, Mich., auto maker's costs, cutting production and selling assets in hopes of making Chrysler a smaller and profitable company.

The hedge fund and private-equity firm a year ago acquired an 80.1% stake in Chrysler from Germany's Daimler AG in exchange for a promise to invest $5 billion in the auto maker and more than $1 billion in its financing arm.

But it's facing an uphill climb in Chrysler. The auto maker lost about $1.6 billion in 2007, and this year the auto market has steadily worsened. U.S. auto sales are off about 10% so far this year and 2009 is expected to be flat or weaker as housing woes and a sluggish economy sap demand.

Normally the launch of a redesigned Ram would put a charge into Chrysler's sales but the rise in gasoline prices has only complicated matters. In the past few months Americans have steered away from big trucks in favor of small, fuel-efficient cars. Through August, sales of full-size pickups are down 25%. Ram sales are down 29%, to 175,246 from 246,878 in the first eight months of 2007.

That represents a huge hit to the bottom line. Detroit's Big Three generally make about $8,000 in operating profit on each large truck they sell.

Moreover, the Ram will face tough competition. Ford Motor Co. is launching this fall an updated version of its F-150, the top-selling truck in the market.

If the Ram isn't a home run, Chrysler has few other models immediately behind it in the pipeline to drive new sales. It has no major new-product launches in the works for 2009. Those coming in 2010 mainly include larger vehicles that many customers are now shunning: the Jeep Grand Cherokee and Dodge Durango, both sport-utility vehicles, and the Chrysler 300, a large, family sedan.

Chrysler is also supposed to launch a small car made by Nissan Motor Co., and may offer hybrids or electric vehicles developed by auto makers in 2010. But it's unclear whether these vehicles can generate significant volume or profit for Chrysler. Such rebadged models generally sell in limited numbers and have thin margins, said Michael Robinet, an automotive analyst at CSM Worldwide, which tracks and forecasts auto production.

"A lot of vehicles Chrysler has coming are of the large variety, which aren't selling right now," Mr. Robinet said. "I think it's fair to say Chrysler is going to be very challenged in the short term."

CSM forecasts Chrysler will produce only 1.55 million vehicles in 2009, about 500,000 fewer than this year and half as many as in 2005. Even with the new truck in the market, CSM predicts Chrysler's Ram output will fall in 2009 to 245,000 trucks, down from 280,000 this year.

Earlier this year Mr. Press and Chrysler Chief Executive Officer Robert Nardelli said Chrysler aims to sell roughly two million vehicles a year once its turnaround is complete.

Chrysler dealers believe they have a winner in the new Ram. The truck features a more lavish and comfortable interior and a new type of coil suspension that is supposed to give the vehicle a car-like ride. It will be available with "Rambox" compartments in the bed for storing tools and a rear camera to give drivers a view of what's behind when they are backing up.

"I've never been so excited about a new truck," said Steven Wolf, general manager of Helfman Dodge in Houston. "This thing looks bad -- and when I say bad, I mean it's good."

By: Jeff Bennett and Neal Boudette
Wall Street Journal; September 11, 2008

Automakers Hurting in New Economy

Being in the auto-parts business these days has a bit of a gerbil-on-a-treadmill quality to it. Companies are tasked with keeping up with the altered needs of consumers and the drastic production changes from the big auto makers, as well as the need to reduce costs.

Investors are pessimistic about the future of a number of these companies, particularly after Tuesday's report on consumer confidence from the Conference Board showed that consumers who plan to buy cars in the next six months fell to 4.8 percent, one of its lowest readings in history.

The news was the latest in a series of factors causing investors to revalue the debt issued by some of the auto-parts makers. American Axle & Manufacturing Holdings Inc., which recently settled a labor dispute, has struggled mightily, as it is one of General Motors Corp.'s biggest suppliers of parts related to light trucks -- where GM and others are scaling back.

In the past month, American Axle's bonds, which carry a coupon of 7.875 percent and are due in 2017, have fallen by 11 cents to trade at 75 cents on the dollar, according to KDP Investment Advisors of Montpelier, Vt. They trade with a yield of 12.65 percent, or about 8.6 percentage points above comparable Treasurys.

The bonds have become quite expensive to insure, as well. The cost of insuring $10 million in bonds against default for five years rose to $900,000 Wednesday, compared with $730,000 on June 20, according to Phoenix Partners Group. The consumer-confidence data were responsible for part of the repricing of such risk.

Similarly, TRW Automotive Holdings Corp.'s credit-default swaps reflect a cost of $583,000 to insure a similar amount of debt, compared with $342,000 a month ago, according to Markit Group in London. That company's bonds trade at about 90 cents on the dollar, but the company's geographic diversity and its main product, automotive safety systems, "continue to enjoy favorable trends in demand and content per vehicle," according to KDP.

American Axle shares hit their lowest level since 2001 earlier in the week, but Wednesday, they ended up 42 cents, or 4.4 percent, at $10.08 after the company said it will be cutting white-collar jobs as well as blue-collar jobs.

"We're reaching a point with the price of oil where you are really changing the structure of industries," said Bruce McCain, chief investment strategist at Key Private Bank. "The automotive industry is under that sort of threat: a major shift in terms of what buyers of those products or services are going to do longer-term, and shrinkage in capacity and profitability."

By: David Gaffen
Wall Street Journal