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Lenders may be prepping Chrysler counteroffer

The pace of negotiations between Chrysler LLC and its debtholders picked up this week, but talks at General Motors Corp. have slowed.
/ Source: The Associated Press

The pace of negotiations between Chrysler LLC and its debtholders picked up this week, but talks at General Motors Corp. have slowed as both companies face looming government deadlines to cut their debt in order to stay out of bankruptcy.

Banks and other Chrysler creditors that hold $6.9 billion in secured debt are preparing a counteroffer after they rejected a proposal from the automaker and the government to erase the loans for $1 billion, according to a person briefed on the negotiations.

At GM, a group representing bondholders is still waiting for a counteroffer from the company, according to another person with knowledge of the talks.

Both people spoke on condition of anonymity because the negotiations are private.

The Treasury Department is getting involved in the negotiations with GM and Chrysler’s debtholders after the companies failed to finalize their restructuring plans by the government’s original March 31 deadline. President Barack Obama gave the automakers more time, but with instructions to make even tougher cuts.

Last week, the Treasury Department was pressing GM to offer bondholders a small amount of its stock in exchange for their $28 billion of GM debt, according to published reports. That would be much less generous than a similar offer GM made two weeks ago.

There’s more urgency at Chrysler because the Auburn Hills-based company is a little more than two weeks away from its new April 30 deadline to get concessions from its creditors and unions and ink a deal with Italian automaker Fiat Group SpA. If the Fiat alliance isn’t finalized by then, the government has threatened not to provide any more aid and let Chrysler be sold off in pieces.

Chrysler’s lenders will ask for more than the initial offer of 15 cents on the dollar, the person said Tuesday. They also are likely to seek equity in the company so they can benefit if the Chrysler-Fiat alliance becomes profitable, said the person briefed on the Chrysler talks.

The counteroffer from a lenders’ steering committee could come by the end of the week, the person said.

The Obama administration has given GM until June 1 to negotiate concessions from bondholders and unions, or else the Detroit company will be forced into Chapter 11 protection, where drastic cuts could be made and the bondholders might end up empty-handed.

The government has said it will provide financing for a short “surgical” bankruptcy that would allow GM to shed debt, contracts and money-losing operations in order to reorganize into a smaller, profitable company.

Chrysler lenders have more leverage with the company than GM’s bondholders because the Chrysler loans are secured by company assets, said Douglas Baird, a professor who specializes in bankruptcy at the University of Chicago Law School. Bondholders’ debts are not secured and seldom do they get much in bankruptcy proceedings, he said.

“At least if you have a first-lien debt, you can threaten to take the assets at some point,” Baird said. “That’s dramatically different than if you’re a general creditor of the company where you don’t have collateral, you don’t have liens.”

First-lien Chrysler lenders represented by the steering committee include 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, according to the person familiar with the negotiations.

First-lien lenders generally get more than 15 percent when a company is liquidated through bankruptcy courts, but the lenders would rather get a larger payment for their debt plus equity, the person said.

Standard & Poor’s ratings services last week said Chrysler’s lenders can expect a 30 percent to 50 percent recovery if the automaker defaults on the loans.

Baird said negotiations with the automakers are complicated by the possibility that debtholders could have purchased credit default swaps, or insurance against the companies defaulting on their obligations. If that’s the case, they have little incentive to settle for less because a bankruptcy would likely trigger an insurance payment.

“In this new world, figuring out the incentives of the parties is hard,” he said.

At Chrysler, the automaker has been talking with Fiat about giving the Italian automaker an initial 20 percent stake in exchange for Fiat’s small-car and fuel-efficiency technology. Fiat’s share would grow when certain milestones are met, but it will not take on any of Chrysler’s debt.

Chrysler Vice Chairman Jim Press has said he is optimistic the company will finish the Fiat talks by the April 30 deadline, but he told dealers during a conference call Tuesday that the alliance was not a done deal.

Spokeswomen for the Treasury Department, which oversees the Obama administration’s auto task force, and Chrysler would not comment on the negotiations. A message seeking comment was left for a GM spokeswoman.