Chrysler lenders offer to swap US$2.5 billion for equity

DETROIT — Banks and hedge funds that hold US$6.9 billion in Chrysler LLC debt have proposed forgiving $2.5 billion of it in exchange for about a 40 per cent stake a Chrysler-Fiat alliance, according to two people briefed on the proposal.

DETROIT — Banks and hedge funds that hold US$6.9 billion in Chrysler LLC debt have proposed forgiving $2.5 billion of it in exchange for about a 40 per cent stake a Chrysler-Fiat alliance, according to two people briefed on the proposal.

One of the people said the lenders delivered their counterproposal to Chrysler and the U.S. Treasury Department late Monday night. Neither person wanted to be identified because the negotiations are private.

The lenders also want Fiat to invest $1 billion cash in Chrysler, and they want to appoint one person to the company’s board, according to term sheets obtained by The Associated Press.

The counteroffer comes as Chrysler races to meet a government-imposed April 30 deadline to swap debt for equity, cut labour costs and negotiate an alliance with Italy’s Fiat Group SpA. If it misses the deadline, government aid will end and Chrysler likely faces liquidation.

Last week, creditors rejected a U.S. Treasury Department offer to reduce the debt to $1 billion, absolving Chrysler of about 85 per cent of its secured loans. The counteroffer, which would swap about 35 per cent of the debt for equity, falls short of government restructuring goals that called for Chrysler to retire at least two-thirds of its debt.

Spokeswomen for the Treasury Department and Chrysler declined to comment.

After the counteroffer was made public Tuesday, Moody’s Investors Service lowered its rating of Chrysler’s corporate family of debt one notch from “Ca” to the lowest possible rating, “C,” indicating “the certainty that Chrysler … will file for bankruptcy” or restructure its debt in a way that would be considered a default for ratings purposes. The ratings agency also lowered its estimated rate at which creditors would recover their debt to 20 per cent from 50 per cent.

The company also affirmed General Motors Corp.’s “Ca” family debt rating but reduced its estimated recovery rate to 30 per cent from 50 per cent. As part of its own government-managed restructuring, GM is trying to persuade its bondholders to take company stock in exchange for much of the company’s $28 billion in bond debt.

Chrysler is living on $4 billion in federal loans and could get another $500 million to survive through April, but without massive restructuring and a Fiat deal, Chrysler won’t get any more aid, government officials have said.

The proposed deal would give Fiat a 20 per cent stake in Chrysler in exchange for Fiat’s small-car technology, but Fiat wouldn’t assume any debt or invest any cash. Fiat CEO Sergio Marchionne spent Tuesday in Washington talking to the government’s auto task force about the deal.

GM has received $13.4 billion and could get up to another $5 billion to survive until its June 1 deadline, according to a government report released Tuesday.

The counteroffer from a steering committee of Chrysler creditors would give the equity stake to first-lien lenders including Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and several smaller banks, plus some hedge funds. Chrysler has about 45 first-lien lenders who would be first in line to get money if the company’s assets were liquidated.

“The goal is something close to 40 per cent of the equity” in the revamped company, according to one of the people briefed on the lenders’ proposal. “Taking equity is a risky proposition,” the person said.

U.S. Representative Gary Peters (D-Mich.), whose district includes Chrysler’s Auburn Hills headquarters, said the lenders aren’t negotiating in good faith.

“These debtholders were offered fair market value for their debt and the banks have responded by asking for a windfall,” he said in a written statement. “It is extremely disappointing that while other stakeholders have agreed to work with President Obama to advance Chrysler’s restructuring, financial institutions that have already taken billions of dollars in taxpayer support are refusing to do the same.”

When the Bush administration agreed to give Chrysler and GM loans last year, it set targets for their creditors to swap two-thirds of their debt for equity. The Obama administration has been less clear about how much debt must be exchanged, saying in a March 30 statement that Chrysler must have a “sustainable debt burden.”

“This at a minimum will require extinguishing the vast majority of Chrysler’s outstanding secured debt and all of its unsecured debt and equity, other than trade creditors providing normal trade terms,” the statement said.

One of the people briefed on the counteroffer said the debtholders are aware that it doesn’t meet the two-thirds debt-for-equity swap required by the Bush administration, but it would be a piece of an overall plan to wipe out most of Chrysler’s debt.

Including the secured debt and government loans, Chrysler owes about $23.5 billion, including $10.6 billion to a United Auto Workers trust fund that will take over retiree health care costs starting next year. It also owes $1 billion each to its owners, Cerberus Capital Management LP and Daimler AG.

The company is negotiating with the UAW to take equity for part of the trust fund obligation, as well as other concessions.

Bankruptcy experts have said the secured debtholders would be less likely to settle for pennies on the dollar because their loans are secured by Chrysler’s physical assets and because they likely purchased credit default insurance that would repay them if Chrysler defaults.

The lenders committee issued a statement Tuesday night saying it believes a solution can be reached “while recognizing our legal status as first-lien senior secured lenders and the duties we have to our shareholders and investors, which include pension funds, endowments, retail brokerage account holders, and other investors.”

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