Chrysler Payments for Incentives, Etc

Wall Street Journal, May 6, 2009: “Chrysler has asked the U.S. Bankruptcy Court in Manhattan for clearance to pay $753 million owed to dealers for sales incentives. In court documents, it said it only intends to pay dealers it hopes to keep in its network” These dealer obligations include Warranty Programs, Extended Service Programs, Sales Incentives (allowances, discounts, holdbacks, etc), Dealer Credits (overbillings, reconciliations, damaged parts, vehicle damage, etc.), and Dealer Support Programs and Promotional Allowances (joint advertising and marketing programs). Chrysler requested authority from the Bankruptcy Court to treat these as ordinary course of business payments and to continue to make them and reconcile them on the Parts Statement.

The first day motion seeks to give Chrysler sole discretion to pay or not. They can pull the plug at any time and pay some, but not all dealers.. On Sales Incentives, the motion states “The Debtors are working to balance the competing considerations of conserving estate resources against the need to provide financial support to those dealers critical to their network, and thus, to the going concern value of their assets, brands and businesses. Accordingly, the Debtors intend to exercise their discretion to honor and pay Sales Incentives carefully, taking into account such factors as a dealer’s financial need, credit risk and any objective market factors. The Debtors expect that they will pay no more than 75% of the total accrued but unpaid obligations for Sales Incentives as of the Petition Date.”

“given the proposed assumption of the majority of the Debtors’ dealer agreements and assignment of these agreements to the Purchaser [Good Chrysler]…approval of the payment of such obligations at this time generally will not alter the ultimate amount paid to such dealers, but simply will alter the timing of such payments.”

Proposed Order Approving Bidding Procedures, May 3, 2009

As late as 90 days following the Closing date of the 363 sale, New Chrysler “may, in its sole discretion, exclude any of the Designated Agreements [e.g. franchise agreements Old Chrysler designated for assumption and assignment]…[and those executory contracts] shall no longer be considered Designated Agreements; shall not be deemed to be, or to have been , assumed or assigned; and shall remain subject to assumption, rejection or assignment by [Old Chrysler].”

Preliminary DIP (means "debtor is possession") Budget – 9 Weeks – Assuming a 363 Sale,”
Exhibit A to Supplemental Declaration of Robert Manzo dated May 3, 2009 “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.” And “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.”

AutoNews.com May 4, 2009:

“The company also said in U.S. Bankruptcy Court here it won't make incentive payments to all of its dealers. In filings today, Chrysler said it will "only pay incentives to those dealers that they believe have value to the acquiring company," to be controlled by Italy's Fiat S.p.A. Chrysler hasn't said how it will measure that value” and “In supporting documents, Chrysler said its post-bankruptcy budget assumes that 25 percent of its dealers won't get the incentive payments "as the company looks to reorganize its dealer network." Kathy Graham, a Chrysler spokeswoman, said she could not immediately clarify what that means.”
And
“Chrysler adviser Robert Manzo said Chrysler had sought $1 billion for dealer incentive payments but scaled that back to $753 million after discussions with the U.S. Treasury. That amounts to a 25 percent cut.
Chrysler has not said how it will decide which dealers will continue with the new company and which ones will not. Chrysler co-President Jim Press last week asked dealers to be patient while it put together a list.
As of March 31, Chrysler had 3,215 dealers. If it cuts out payments to 25 percent of its dealers, that means more than 800 dealers won't receive the payments. In its filings, the company also said its overall incentive spend would be reduced 50 percent from June 1 to July 5, which would be the second month of a possible 60-day reorganization.”