DBRS Comments on U.S. Government Actions on Chrysler

DBRS notes that the Obama administration has officially rejected the restructuring plan of Chrysler LLC (Chrysler or the Company), further specifying that the Company would not be viable on a stand-alone basis. However, the U.S. government has also committed to providing sufficient working capital to the Company for a period of 30 days. The actions of the U.S. government have no immediate impact on Chrysler’s current ratings, with its 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. Absent additional funding, the Company’s liquidity position would likely fall below minimally required levels.

The Obama administration deemed that Chrysler’s submitted restructuring plan was not strong enough to ensure the Company’s viability going forward. Additionally, the U.S. government concluded that Chrysler could not be viable over the long term as a stand-alone company and as such would require a strategic partner. Accordingly, the government has agreed to provide Chrysler with 30 days of working capital, during which time the Company is to complete a more definitive agreement with Fiat S.p.A. (Fiat; rated BBB (low) with a Negative trend). DBRS notes that a framework to a subsequent agreement with Fiat has apparently been reached, although details have yet to be provided. It was also noted that Chrysler’s subsequent restructuring would require further concessions than those already made by several stakeholders, most notably creditors and unions but also suppliers and dealers. If a partnership with Fiat is completed, the U.S. government would consider providing a further $6 billion in funding to Chrysler. The U.S. government also specified that Fiat would be prevented from acquiring a majority stake in Chrysler prior to the repayment of the government funding.

The U.S. government also revealed that an expedited bankruptcy process might represent the best path for Chrysler to eliminate unsustainable debt loads. It was emphasized that this bankruptcy process would not be a liquidation, but instead an accelerated restructuring of the Company. In response to consumer fears, the U.S. government has also agreed to guarantee the warranties of Chrysler vehicles during the restructuring period. DBRS considers this a positive move as it will help mitigate consumers’ perceived risk of acquiring a Chrysler vehicle given the Company’s weak financial position. Additionally, the government will attempt to accelerate federal purchases of government cars while also increasing the flow of credit to consumers and dealers.

DBRS notes that the announced measures are in response to industry sales that have collapsed in 2009 below levels that were already very weak the prior year. Total U.S. industry sales in both January and February 2009 were below ten million units on a seasonally adjusted annual basis compared with total annual unit sales of 13.2 million in 2008 and 16.1 million in 2007.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Automotive Suppliers, which can be found on our website under Methodologies.

This is a Corporate rating.