By Deepa Seetharaman and Soyoung Kim
DETROIT/NEW YORK (Reuters) - A United Auto Workers trust fund will retain its shares of Chrysler Group LLC in a bid to maximize returns for retiree healthcare costs rather than follow the Obama administration in a quick exit of its investment, two people familiar with the fund's strategy said.
The union's healthcare fund, known as the UAW's VEBA trust, is considering a range of options to cash in on its 45.7 percent stake in Chrysler at a time when the value of that investment is rising, these people said.
The options could include selling shares to an outside investor, including Chrysler's majority owner Fiat SpA (FIA.MI), or selling in an initial public offering if the stock is eventually listed. Fiat owns 52 percent of Chrysler.
The UAW's VEBA trust has delegated the decision on how and when to exit its Chrysler investment to its fiduciary adviser, a subsidiary of Brock Capital Group, one of the people said.
Last year, the trust hired Brock Fiduciary Services to manage its stake in Chrysler. Brock also represented VEBA during Chrysler's talks to refinance $7.6 billion in government debt, and is calculating Chrysler's market value for the union fund, people familiar with the matter said.
Under the 2009 agreement with the U.S. Treasury, VEBA's proceeds from a sale of its Chrysler stake are capped at a "threshold amount." This amount was set at $4.25 billion in 2009 and was set to grow at a 9 percent compound annual interest rate, according to the agreement.
When factoring in this interest rate, that cap on the union's payout has risen to nearly $5 billion, one of the sources said.
If proceeds from the sale exceed this amount, the excess cash goes to a third party or a holder. Fiat is the holder under its agreement with Treasury on Thursday, which has given the Italian automaker the option to take over all of the No. 3 U.S. automaker.
IPO LESS LIKELY?
The question of how VEBA -- affiliated with a union representing nearly 38,000 Chrysler plant workers -- will handle its investment in the automaker is one of the remaining unresolved issues from Chrysler's 2009 bankruptcy.
The Obama administration's decision to bail out Chrysler gave the union trust what was initially a majority ownership position of 55 percent of its shares.
President Barack Obama visited a Chrysler plant in Toledo, Ohio, on Friday to hail the automaker's repayment of its bailout debt last week, six years earlier than expected.
On Thursday, the U.S. Treasury reached a deal to sell its equity stake in Chrysler to Fiat, severing all remaining ties to the U.S. automaker. The Canadian government said it was open to doing the same for its 1.7 percent stake.
The slower approach by the UAW's healthcare trust fund means the autoworker's union may still have its major holding in Chrysler as it opens a crucial round of contract talks this summer. The union is seeking to win back some concessions it made during the 2007 negotiations as Chrysler slid toward bankruptcy under its former owners Daimler AG and Cerberus.
Sergio Marchionne, chief executive of Chrysler and Fiat, said this week that an IPO would be the "most efficient" way for the VEBA to cash out, but added it was not the only option.
"If VEBA finds a buyer for the position and Fiat accepts as the holder of the stock, there's nothing that would require an IPO," Marchionne told reporters this week.
Marchionne on Friday said he had not yet started talks with the VEBA. "They're not an investment fund. They need to set aside obligations for their retirees," Marchionne said. "I expect to work with them to find a way to allow them to exit at the right time. But neither Chrysler nor Fiat is going to get pushed into a position. They will do it when it's ready."
FLYING LEAP OF FAITH
The VEBA was established in 2007 to shift the responsibility for paying for retiree healthcare from Chrysler and its larger Detroit-based rivals General Motors Co (GM.N) and Ford Motor Co (F.N). The automakers said that liability made them uncompetitive against foreign automakers.
As part of the Chrysler restructuring brokered by the Obama administration, the union agreed to convert part of the debt Chrysler owed to the VEBA fund to equity in an automaker many had written off as worthless, an act that Marchionne this week described as a "flying leap of faith."
Fiat, which was given its initial stake in Chrysler in exchange for agreeing to run the troubled automaker, paid the U.S. Treasury $500 million for its stake in Chrysler. Fiat will also pay an additional $75 million for Treasury's option to buy all shares held by the UAW retiree trust.
Last week, Chrysler fully repaid $7.6 billion in loans it owed to the U.S. and Canadian governments from the bailout. That step allowed Fiat to pay $1.27 billion in cash for a 16 percent stake in Chrysler and boost its stake.
Brock, which has offices in Boston and New York, was not available for comment. Representatives for the UAW and the VEBA could not immediately be reached for comment.
Separately, Washington-based Fiduciary Counselors has been retained to advise the VEBA on how to handle its remaining stake in GM, one of the sources said. The VEBA owns 12.8 percent of GM's diluted shares, including warrants.
(Reporting by Deepa Seetharaman in Detroit and Soyoung Kim in New York; Editing by Phil Berlowitz, Matthew Lewis and Robert MacMillan)