A bankruptcy judge on Tuesday ruled that GMAC Financial Services can become Chrysler's preferred lender, potentially sending a slew of new business to the financing company and ensuring that Chrysler's dealers will have access to the loans they need to stay in business.
U.S. Judge Arthur Gonzales approved the four-year deal between Auburn Hills, Mich.-based automaker and GMAC, pending the completion of certain documentation. He also gave pending approval of a risk sharing agreement between Chrysler and Chrysler Financial, which allows the deal between Chrysler and GMAC to go forward.
Gonzales was expected to sign the approval orders for the motions later on Tuesday.
Under the agreement, the exact details of which were sealed by the court, GMAC will be allowed to provide showroom financing to Chrysler dealers and have the right to exclusively offer certain discounted financing rates to Chrysler customers.
Chrysler Financial, a separate company from Chrysler, previously served as the automaker's preferred lender. From the beginning of the fourth quarter of 2008, the company provided loans for about 62 percent of Chrysler dealers and about 50 percent of its customers.
But according to Chrysler court filings, the level of financing provided by Chrysler Financial began to tumble in October and the automaker was forced to look elsewhere to meet its needs.
In addition, after Chrysler filed for bankruptcy protection, Chrysler Financial said it would no longer provide new financing for Chrysler dealers—increasing the automaker's need to find an immediate alternate financing source.
In its filings Chrysler said that with the help of the Treasury Department it considered a variety of other sources for financing and the deal with GMAC represented the best available option.
Michael Keegan, Chrysler's vice president of volume planning and sales operations, testified during Tuesday's hearing that the majority of Chrysler's 3,200 dealers would cease to exist within weeks without financing to pay for their inventories.
Amber Gowen, a spokeswoman for Chrysler Financial, said the company is still evaluating the effects of Chrysler's government-backed restructuring, including the GMAC agreement, and would not speculate on possible resulting effects on Chrysler financial and its employees.
The Farmington Hills, Mich.-based company currently employs about 3,400 people and has a global portfolio of nearly $50 billion.
Like the automakers, GMAC has struggled as a result of the continued decline in demand for new vehicles, while also being hit by the continued downturn in the home mortgage industry and tight credit markets. Late last year, the company was pulled back from the brink of failure by $5 billion in federal aid.
Last week, GMAC was one of 10 financial firms that was ordered by the government to raise more capital after taking a stress test. The financing company needs $11.5 billion, with the most likely source for it expected to the government itself.
Analysts have speculated that a government-controlled GMAC would have the power to offer low-cost loans to buyers of GM and Chrysler vehicles as a way of steering business to the troubled automakers.