Chrysler debt deal reached

Automaker gets key agreement from banks to reduce $7 billion in loans ahead of Thursday's bankruptcy deadline.

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By Chris Isidore, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- The major banks that loaned Chrysler LLC about $7 billion have agreed to significantly reduce that debt, according to the Treasury Department, a move that could save the struggling automaker from having to file for bankruptcy later this week.

"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," said an administration official Tuesday.

The company still needs to win a rank-and-file ratification vote Wednesday of a tentative labor deal reached with leadership of the United Auto Workers union late Sunday, and wrap up an alliance with Italian automaker Fiat before the Thursday deadline set out by the federal government.

But the deal with lenders was generally thought to be the most difficult hurdle the company had to clear in the final week before the deadline.

If Chrysler escapes bankruptcy, that would be a rare bit of good news for the struggling auto industry. Many had predicted that a Chrysler bankruptcy would lead to the company's eventual liquidation.

That could have caused even more problems throughout the industry, as a closure could have led to widespread job losses at dealerships and bankruptcies throughout the auto parts industry.

Big banks may have blinked

Being privately held, Chrysler has not released its financial results for recent years. But the company needed $4 billion in federal loans earlier this year to avoid filing for bankruptcy protection, and it has asked for an additional $6 billion in federal help.

The Treasury Department's auto industry task force found in late March that Chrysler was no longer viable as a stand-alone company and said it needed to reach a deal with Fiat, as well as with its creditors and unions, in order to receive more assistance and avoid bankruptcy. Treasury gave it until the end of April to accomplish those goals.

General Motors (GM, Fortune 500), which has also received federal help to avoid bankruptcy, has until the end of May to reach deals with its creditors and unions. It proposed a plan Monday that would give its creditors a 10% stake in that company, while giving the government and the union up to an 89% stake.

Details of the Chrysler debt reduction deal were not immediately available. The Washington Post reported that creditors agreed to cut the $6.9 billion in secured loans owed to them to $2 billion in return for an equity stake in a reorganized Chrysler.

As recently as last week, the major banks that had loaned money to Chrysler, including Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), were reported to be demanding 65 cents of every dollar they were owed, along with a large equity stake in the company. The Treasury Department was reportedly offering only 22 cents on the dollar and a small equity stake.

Neither of those banks nor Chrysler had any immediate comment on the debt restructuring deal.

The banks were arguing they would do better than that if the company was forced into bankruptcy and its assets were liquidated, because the loans were secured by the company's assets, such as plants, land and equipment.

But some experts, including credit rating agency Standard & Poor's, have suggested that the banks could end up with virtually nothing if the government agreed to fund Chrysler's operations during a bankruptcy reorganization or liquidation, which would put the government in line to get the proceeds of any asset sales.

New owners would face same challenges

The banks are likely to get only a small equity stake in a reorganized Chrysler. The union-controlled trust funds which will assume the responsibility for retiree health care are to receive a 55% stake in the company, according to a source familiar with the agreement, while Fiat is to receive a 35% stake. Treasury and the bank lenders would receive a 10% stake.

Cerberus Capital Management, which bought 80% of Chrysler from German automaker Daimler in 2007, would no longer own a stake in the company according to the reports. Daimler agreed to give up its final 20% stake in Chrysler on Monday, and make $600 million in contributions to its pension funds over the next three years.

If Chrysler avoids bankruptcy, it still remains to be seen if the company can return to financial health anytime soon. Sales at Chrysler LLC, which includes the Chrysler, Dodge and Jeep brands, fell nearly 46% from year-ago levels in the first quarter.

And the company is only a fraction of its former self. It has about 39,000 U.S. employees, only about 40% of the total it had at the beginning of the decade, and has fallen behind Toyota Motor (TM) in sales. It is also close to being overtaken by Honda (HMC) for the No. 4 spot in the U.S. market. To top of page

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