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Chrysler’s biggest lenders settle

Wed., April 29, 2009

Automaker still working on securing deals with Fiat, smaller creditors

WASHINGTON – With just two days left before a government-imposed restructuring deadline, Chrysler LLC took a step away from the brink of bankruptcy Tuesday when its biggest lenders reached a deal with the Treasury Department to slash the teetering automaker’s debt.

Yet Chrysler’s fate remains far from assured. If the company’s smaller creditors don’t get on board, a bankruptcy filing remains a possibility.

But now that Chrysler has a tentative agreement with the United Auto Workers and is closing in on a pact with Italian automaker Fiat Group SpA, Chrysler has cleared nearly all the hurdles ahead of its Thursday deadline. That brings the automaker closer to securing another $6 billion in government aid, keeping it alive and preserving its remaining 54,000 jobs.

“I think this has moved the needle more toward a turnaround,” said Mike Boudreau, a director at O’Keefe & Associates, a Bloomfield Hills, Mich.-based turnaround firm. “They still could file for bankruptcy, but they also could go into it with some hope of reorganizing, too.”

Under a deal reached Tuesday with four banks, Chrysler’s secured creditors would accept $2 billion cash to settle the automaker’s $6.9 billion debt, according to the people familiar with the talks. The people spoke on condition of anonymity because the agreement had not been formally announced.

The Treasury Department has been negotiating with a committee of the creditors, including the big banks Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley. The group also includes several smaller banks and some hedge funds. Messages seeking comment were left for representatives of the banks.

Chrysler and the Treasury still need to persuade the rest of the automaker’s 46 secured creditors to go along with the new proposal. Bankruptcy experts have said it may be tough to get them to take a big haircut because their loans are secured by Chrysler’s physical assets, things like plants and brands that could provide a better payoff if the company is liquidated.

The banks that are on board hold 70 percent of Chrysler’s secured debt, said Brian Johnson, auto analyst for Barclay’s Capital, so a Chrysler liquidation now looks like the “least likely route.”

“We believe it is increasingly clear that Chrysler will be restructured and avoid liquidation,” Johnson wrote in a research report Tuesday.

Boudreau said even if the key deals fall into place, the automaker’s complex restructuring still might require filing for bankruptcy protection. There are other issues to address, such as reducing the size of Chrysler’s dealer network and finding sources of financing for its customers.

Chrysler cleared a major hurdle over the weekend by reaching a new deal with the UAW that would give the union a 55 percent stake in the company. Chrysler will use equity instead of cash to fund at least 50 percent of its $10.6 billion obligation to a union-run health care trust, and the trust would get a seat on the board.

Factory-level union leaders voted unanimously Monday night to recommend that rank-and-file members approve the concessions. Final approval of the new arrangement could come as early as Wednesday.

“It’s important to get some wins under your belt,” Boudreau said. “One win can lead to another win. The UAW deal led to the bondholder agreement, which could lead to a deal with Fiat.”

A person familiar with the Chrysler-Fiat talks said Tuesday that the Fiat deal is near completion. Negotiators for both automakers and the government were waiting on the debt holders before finishing their talks, said the person, who spoke on condition of anonymity because the talks are ongoing.

Fiat spokesman Gualberto Ranieri declined to comment on the possibility of a deal being near. Italian media reported that the viability of the alliance would be announced Thursday.

“The situation with Chrysler will be decided Thursday evening Italian time, and up until that time we won’t have much to say,” Fiat Vice Chairman John Elkann said at the close of a meeting of Exor shareholders in Turin, according to the Italian news agencies Apcom and ANSA.

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