DBRS Comments on Chrysler LLC’s Revised Viability Plan

DBRS notes that Chrysler LLC (Chrysler or the Company) yesterday submitted a revised Restructuring Plan (the Revised Plan) to the United States Department of the Treasury. The Revised Plan has no immediate impact on Chrysler’s current ratings, with the Issuer Rating remaining at CC with a Negative trend. DBRS continues to be of the opinion that the Company has just sufficient liquidity to maintain operations over the near term, with the Revised Plan seeking additional government funding relative to the $7 billion initially requested under the Company’s previous restructuring plan submitted on December 2, 2008. DBRS also notes that, absent additional funding, the Company’s liquidity position could fall below minimally required levels in the near term.

With respect to funding, the Revised Plan requests an additional $2 billion, citing global automotive conditions even more depressed than those stipulated only two months prior. Under its new forecast, Chrysler now projects the U.S. seasonally adjusted annual rate (SAAR) in 2009 to drop to 10.1 million units (from 11.1 million units). In addition, from 2009 to 2012, the Company now forecasts an average SAAR of 10.8 million units, which in aggregate represents a reduction of 7.2 million units over the four-year period. In accordance with this revised scenario, the Company’s total requested funding now amounts to $9 billion; DBRS notes that thus far, $4 billion in U.S. Troubled Assets Relief Program (TARP) funding has been disbursed.

Regarding Chrysler’s deliverables, the Company has outlined the progress it has made on several fronts. With respect to workforce reductions, through year-end 2008 Chrysler lowered its staff levels by 32,000, with a further reduction of 3,000 workers planned for this year. Additionally, the Company eliminated 1.2 million units of production capacity and plans on taking out a further 100,000 units of capacity this year. Four vehicle models were recently discontinued and three additional models are to be phased out this year as well.

Chrysler also indicated that it has reached a new agreement with the United Auto Workers (UAW) to further lower labour costs to a level that is competitive with the transplant automotive manufacturers; however, no specifics have been provided. Similarly, the Company stated that it anticipates that the second-lien debt holders will agree to a debt-to-equity conversion, with no further details being disclosed.

In response to the specific request of the U.S. government, Chrysler also provided a scenario for what would happen if the Company were to fail. However, the Company remains firmly of the opinion that its restructuring would be best achieved outside of formal bankruptcy proceedings. Additionally, the Company contends that it can continue to be viable on a stand-alone basis. However, Chrysler also refers to its proposed strategic alliance with Fiat S.p.A. and notes that this would provide access to competitive fuel-efficient vehicle platforms, as well as distribution capabilities in key growth markets.

Nevertheless, DBRS notes that should the Revised Plan ultimately be approved by the U.S. government and result in additional funding, the Company’s liquidity position would remain weak and not fundamentally changed. For the time being, previous rating actions related to Chrysler sufficiently incorporate its current credit profile. However, the extremely volatile market conditions do not preclude further rating actions in the near term.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.
This is a Corporate (Autos and Auto Parts) rating.