The Treasury Department is directing Chrysler to prepare a Chapter 11 bankruptcy filing by next week, people with direct knowledge of the talks said Thursday. The company faces a deadline of April 30 to come up with a viable business plan supported by its creditors, the United Automobile Workers union, and Fiat, the Italian car company that wants to acquire a stake in Chrysler.
DETROIT - The Treasury Department is directing Chrysler to prepare a Chapter 11 bankruptcy filing by next week, people with direct knowledge of the talks said yesterday.
The company faces a deadline of April 30 to come up with a viable business plan supported by its creditors, the United Automobile Workers union, and Fiat, the Italian car company that wants to acquire a stake in Chrysler.
The Obama Administration has told Chrysler it would provide up to $6 billion in new financing, on top of the $4 billion in loans it already has given the company, if Chrysler could complete a deal by Thursday with a cost structure that gives it a chance of survival. The creditors have, so far, balked at the terms suggested by the Treasury Department.
But negotiations have taken a new direction.
Treasury now has an agreement in principle with the UAW, whose members' pensions and retiree health care benefits would be protected in the event of a bankruptcy filing, said the people with knowledge of the discussions, who asked for anonymity because they were not authorized to discuss the case.
Moreover, under this scenario, Fiat would complete its alliance with Chrysler while the company is under bankruptcy protection.
Lloyd Mahaffey, UAW regional director for Ohio, had no comment about the report.
Chrysler employs about 1,800 workers at its Toledo Jeep Assembly complex, with on-site suppliers employing an additional few hundred. The complex makes the Jeep Wrangler and Liberty and the Dodge Nitro sport utility vehicles.
The company has about 1,000 employees at its Toledo Machining Plant in Perrysburg Township. It makes torque converters and steering columns for several vehicles.
Fiat, a company that was struggling earlier this decade, is seeing new opportunities in Detroit's troubles. Its chief executive, Sergio Marchionne, in Washington for talks on the Chrysler deal in recent days, has raised the possibility of also acquiring General Motors' Opel division in meetings with U.S. officials, a top government negotiator said yesterday.
The Chrysler talks, with the deadline looming, are more urgent than any discussions over Opel, particularly over the
$6.9 billion in Chrysler debt.
Despite any plans for a smooth outcome from a Chapter 11 filing, there are risks in bankruptcy. Consumers may avoid Chrysler cars because of worries about their quality, their resale value, or the ease of getting parts for future repairs.
A bankruptcy filing for Chrysler would likely wipe out equity stakeholders, notably Cerberus Capital Management, which took over the carmaker from Daimler in 2007.
Some analysts questioned whether the Treasury's steps to direct Chrysler to prepare for bankruptcy were an effort to pressure the lenders to come to an agreement outside the courts.
"You have to proceed as if it's happening, and in doing so, you may avoid it," said Jeremy Anwyl, a veteran industry analyst and the chief executive of Edmunds.com, a Web site that offers car-buying advice.
The Treasury Department declined to comment. But an administration official who did not want to be named said, "It should surprise no one that the administration is planning on contingencies, but we remain focused on the goal and engaged with all stakeholders to bring Chrysler and Fiat to a working partnership."
Chrysler spokesman Lori McTavish, said, "As we move forward in this process, we believe it's important to keep all options open."
The creditors' claims are backed by most of Chrysler's collateral, including plants, brands, and equipment, and the senior lenders will argue that they have first claim on those assets - even before repayment of the government's debt.
The government and the creditors have been trading offers. The most recent offer, presented Wednesday, would give the company's lenders about 22 cents on the dollar, or $1.5 billion, and a
5 percent equity stake in a reorganized Chrysler.
Earlier this week, a steering committee of the lenders proposed that they receive 65 cents on the dollar, or $4.5 billion, and a 40 percent equity stake.
Treasury is also working with General Motors Corp. to prepare a possible bankruptcy case, and the terms of a Chrysler filing might offer a glimpse into the shape of a GM filing. GM faces a June 1 deadline in its own efforts to draft a new restructuring plan.
The Canadian government is also expected to participate in backing the company.