Funds News

WRAPUP 1-Chrysler lenders, gov't set deal framework-sources

* Gov’t, Chrysler lenders have deal in principle-sources

* Deal would cut $6.9 bln debt in exchange for $2 bln cash

* Lenders doing due-diligence on deal-source

* Fiat says decision on alliance due Thursday

By Poornima Gupta and Caren Bohan

DETROIT/WASHINGTON, April 28 (Reuters) - The U.S. Treasury and Chrysler LLC’s secured lenders have reached the framework of a deal that would wipe out $6.9 billion of the automaker’s debt in exchange for $2 billion in cash, people with knowledge of the talks said on Tuesday.

Should this deal be approved, it would mark a major step toward improving Chrysler’s financial picture. However, the tentative deal does not automatically guarantee that the automaker will avoid bankruptcy as it heads toward the U.S. government deadline to restructure.

Chrysler’s lenders are currently doing due diligence on the terms of the deal and it has yet to be approved by all of the debt holders, one of the people said.

“This is a very significant concession that these banks made,” a second source said, adding that the deal would not provide lenders with equity in the company.

But there is still a possibility of a “quick surgical bankruptcy” should there be a need to “drag along any recalcitrant banks,” the source warned.

Further details on the high-stakes debt restructuring deal were not immediately available, and representatives of the lenders and the Treasury could not immediately be reached for comment. Chrysler declined to comment.

The news comes as Chrysler races toward its April 30 deadline to complete an alliance with Italy's Fiat SpA FIA.MI and follows an announcement by Chrysler that it has reached an agreement with the United Auto Workers (UAW) leaders to modify its labor contract and reduce the amount the company owes a retiree health fund.

Fiat’s deal with Chrysler would be decided close to the Thursday deadline, Fiat Vice Chairman John Elkann said on Tuesday. “Up till the end, we won’t have much detail,” he said, adding he was in contact with Fiat Chief Executive Sergio Marchionne. [ID:nMAT009484]


The negotiations among Chrysler’s lenders, the UAW and Fiat were taking place in parallel.

The creditors were wary of the risk that the Obama administration’s autos task force would try to force a settlement that favored the union.

“The agreement from Chrysler’s principal banks is an exceptional accomplishment in line with the president’s firm commitment that all stakeholders sacrifice to make this deal succeed,” a senior Obama administration official said.

The committee of Chrysler's lenders including JPMorgan Chase & Co JPM.N, Goldman Sachs Group Inc GS.N, Morgan Stanley MS.N and Citigroup Inc C.N last week proposed taking $3.75 billion in debt and a 40 percent equity stake in a restructured company.

That was above an offer of $1.5 billion in debt and a 5 percent equity stake from Treasury Department officials.

U.S. officials had been expected to make a new offer on Monday to the lenders’ group representing about 45 institutions, including some hedge funds, that holds the secured debt of the struggling automaker.

In contrast to the banks, some of the funds had held out for a higher settlement and had argued that Chrysler’s secured debt had to be paid out at a higher return than what was offered to the UAW for its unsecured healthcare-related claim.

That stance had come under fire from members of the Michigan congressional delegation and Michigan Governor Jennifer Granholm, who said the creditors were holding out for an unfair payout that threatened to bankrupt Chrysler and scuttle its planned alliance with Fiat.

More than $4 billion of Chrysler’s total first-lien debt is still held by the major banks led by JP Morgan, people familiar with the matter have said.

Chrysler has been kept afloat with $4 billion in federal loans since the start of the year and could get another $500 million before its month-end restructuring deadline established by the autos task force.

The task force, which is headed by former investment banker Steve Rattner, has said it would be willing to invest another $6 billion in Chrysler if the automaker could complete the Fiat alliance and agreements to cut debt and costs with its creditors and major unions. (Additional reporting by Jui Chakravorty, Kevin Krolicki, John Crawley and Gianni Montani) (Editing by Gerald E. McCormick and Patrick Fitzgibbons)