More Detail Emerges on Chrysler Dealer Cuts

A filing by Chrysler on May 3 has provided more detail on the scope of the intended dealer cuts. In a Chapter 11 reorganization, Chrysler is what is called the "Debtor in Possession," or DIP for short. In a Chapter 11 reorganization, the DIP is authorized to continue to operate the bankrupt company's business subject to control and oversight by the Bankrupcty Judge. Part of that oversight is a requirement that the DIP submit a budget showing how it intends to operate during the bankruptcy proceeding.

On May 3, Chrysler filed its DIP Budget for the 9 week period following its bankruptcy filing. The budget assumes the sale of substantially all of Chrysler's assets to New Chrysler is consumated.

Of interest to the dealer body are the following quotes from the DIP Budget:

• “The DIP Budget assumes that incentive payments to 25% of the Company’s dealers are not made as the Company look to reorganize its dealer network. The DIP Budget also assume that incentives…are reduced a further 50% from June 1st – July 5th.”

• “Incentives – assumes that the Company will only pay incentives to those dealers that they believe will have value to the acquiring company. Assumes that such payments represent 75% of the 13-week Cash Forecast amounts. Assumes that incentives are further reduced 50% for June 1st – July 5th.”

This confirms that Chrysler intends to pay incentives only to those dealers whose franchise agreements it plans to assume and assign over to New Chrysler. The DIP Budget assumes that 25% of the current dealer body will not receive incentive payments and that this will initially translate to a 25% reduction in the incentive payments that will be paid to dealers. And, a bit forbodingly, the DIP Budget assumes that incentive payments to dealers will be reduced by an additional 50% during the last 5 weeks of the budget period. It is not clear from the face of the DIP budget what this portends for dealer body cuts.