Several months ago, Fiat announced an alliance with Chrysler in which it would take a 35% ownership stake in Chrysler. In a post entitled Fiasco for Fiat, I discussed the alliance’s prospects for success, and what the deal meant for Chrysler and its creditors. With respect to Chrysler’s outstanding debt, I wrote:

As a Chrysler creditor (a U.S. taxpayer), anything that increases the likelihood, even infinitesimally, of receiving a return on my investment makes me happy. The U.S. taxpayer (and by corollary, the U.S. government) should therefore be positively predisposed toward this deal, taking comfort in the fact that, at the very least, in exchange for a 35% ownership stake in Chrysler, Fiat should be commensurately responsible for 35% of the liabilities. This should come as welcome news, assuming Fiat can keep Chrysler viable long enough to repay the U.S. government.

I then expressed incredulity at Fiat’s willingness to sign itself up for 35% of Chrysler’s liabilities:

Personally, I can’t believe that signing up for 35% of the liabilities of Chrysler would not be enough to scare off Fiat, …or any other potential investor for that matter.

But who am I to object. Caveat Emptor.

Well guess what?? Surprise, surprise. Fiat is not willing to assume 35% of the liabilities. According to recent reports (see Fiat Not to Take Debt), Fiat, while interested in owning 35% of Chrysler’s upside, is not interested in inheriting 35% of Chrysler’s problems. It’s like Geithner’s Public Private Investment Partnership – Fiat wants to be able to benefit from the upside while Chrysler’s current shareholders/creditors bear the downside risk (heads I win, tails you lose). According to the AP article:

A public tiff between Italian automaker Fiat SpA and Chrysler LLC apparently ended Friday when Chrysler rescinded a statement on its Web site that Fiat would be responsible for part of Chrysler’s debt if the two companies join forces.

Chrysler, in a Web video on Thursday explaining why an alliance for the two companies would be good for Chrysler and the country, said Fiat would be responsible for 35 percent of what Chrysler owed to the U.S. government.

But Fiat on Friday denied that it would be responsible for any of Chrysler’s debt.

…Chrysler, in a statement issued Friday, reversed the claim it made on the Web and said Fiat would become an equity holder.

“To clarify, this does not mean Fiat would assume responsibility for any of Chrysler LLC’s debt,” the statement said.

Fiat Group said in a statement Friday said it “intends to make absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness to Chrysler.”

I have to admit, from a transactional perspective, I am not sure exactly how such an arrangement could be structured – i.e., how a firm can acquire 35% of the residual claims to a firm but not also be liable for 35% of the outstanding claims on the firm. Call me crazy, but that’s what I thought “ownership” meant. But that’s something for the lawyers to figure out.

What most interests me is what Fiat’s lack of commitment to Chrysler might mean for Chrysler’s prospects of receiving additional government aid. Answer: It cannot bode well for Chrysler.

Personally, I do not believe Chrysler deserves additional government loans with or without Fiat (see The GM and Chrysler Plans, Aid for Chrysler? Just say No! and Is the End Nigh for Chrysler? for details). That notwithstanding, the latest Fiat developments cannot help.

This entry was posted on Tuesday, March 24th, 2009 at 11:46 am and is filed under Bankruptcies, Corporate Strategy, Economy, International Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.