Thursday, November 20, 2008

Chrysler credit rating could be cut


Fitch Ratings cautioned Wednesday that it might lower Chrysler's credit rating to a level that means default is probable, after the revelation that the automaker is quickly running out of money.

Chrysler LLC CEO Bob Nardelli reiterated to a U.S. House committee Wednesday that Chrysler had considered a prepackaged bankruptcy before seeking help from the government.

"Fitch expects that federal financial assistance over the next quarter and the forbearance of trade creditors will be required in order to avoid a default," the credit rating agency said in a statement.

Nardelli has said the company would seek $7 billion in government loans, while General Motors Corp. has said it would seek $10 billion to $12 billion. Ford Motor Co. has said it would like access to $7 billion to $8 billion if it needs it.

A report Wednesday by J.P. Morgan noted that the amount Chrysler is seeking suggests it could compensate for a likely 2009 cash burn.

"Proposed Chrysler assistance is slightly outsized in relation to its market position," a report by lead author Himanshu Patel said. "It was suggested these amounts could compensate for the automakers' likely FY2009 cash burns."

Fitch said that without "material federal assistance in the short term" the agency would review the current rating for potential downgrading to CC -- which "indicates that default is probable" -- from CCC.

"The provision of federal assistance may not preclude a downgrade," the agency added.

During the third quarter, Chrysler burned through about $1 billion a month and ended the period with $6.1 billion in cash on hand, Nardelli has said.

Chrysler has $4 billion to $5 billion in monthly financial obligations.

To change its break-even point, Chrysler has cut $2.2 billion in fixed costs this year.

"Chrysler is dependent on the financial capacity and willingness of its suppliers to continue extending trade credit, as the company does not have sufficient resources to finance ongoing operations in the event that trade credit is curtailed," Fitch said. "Fitch expects that federal aid to Chrysler is probable, either directly or through facilitating a merger, although the amount, timing, structure and term remain uncertain."

Nardelli said Chrysler is not confident it would be successful in emerging from bankruptcy.

On Tuesday, he told a Senate banking committee that Chrysler looked at a prepackaged bankruptcy before coming to Congress for help. On Wednesday, he reiterated: "Bankruptcy would be devastating. I know from Chrysler's standpoint and working with my colleagues we've looked at all of the various options of pre-negotiation, pre-pack, etc."

Nardelli indicated that Chrysler was thinking about what would happen if it had to go through bankruptcy.

"Yes, we have gone through, and have outside advisers to help us think through, the various aspects should our liquidity become an issue," Nardelli said.

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