WASHINGTON The Treasury Department has reached a tentative agreement with four of Chrysler s major debt holders in a bid to keep the automaker out of bankruptcy protection, two people familiar with the talks said Tuesday.
Under the agreement, the four banks will forgo claims to their portion of Chrysler s $6.9 billion debt in exchange for $2 billion in cash when the deal closes, said the people, who spoke on condition of anonymity because the agreement has not been formally announced.
We view this as a huge step forward, said one of the people.
The people did not identify the banks involved in the deal, but Treasury has been negotiating with a committee of creditors including Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and several smaller banks, plus some hedge funds.
Messages seeking comment were left for representatives of the banks.
Treasury needs to persuade all 46 banks and hedge funds that hold Chrysler debt to go along, the people said. If not, a bankruptcy filing could still be possible for the nation s third largest automaker.
If the remaining debt holders agree to the deal, that leaves a partnership with Italian automaker Fiat Group SpA as the lone remaining hurdle to Chrysler meeting a government-imposed deadline Thursday to complete a number of major restructuring steps and become eligible for further government aid.
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 asked not to be identified because the talks are ongoing.
Chrysler cleared another hurdle last weekend when it reached a deal with the UAW that would give the union a 55 percent stake in the company and assurances over issues like worker health care. Factory-level union leaders voted unanimously Monday night to recommend rank-and-file members approve the deal, and ratification votes should be finished by Wednesday.
The people familiar with the matter said a surgical bankruptcy is still possible if all of Chrysler creditors don t go along with the deal, but that it was not the preferred option for resolving Chrysler s problems.
The debt holders and the Treasury Department have been trading proposals in the past several weeks but had remained far apart on how much the creditors would recoup in a Chrysler restructuring. Debt holders last week offered to reduce their debt to $3.75 billion in exchange for a 40 percent stake in the company. Treasury has offered much less generous terms.
The people said the government told the debt holders that they could lose everything if no deal was reached.
Chrysler has been living off $4 billion in government funds since the start of the year and would likely need more to avoid bankruptcy.
In March, the government s auto task force rejected Chrysler s viability plan and determined that the Auburn Hills, Mich., automaker could not survive without taking on a partner. The government told the company it must ink a deal with Fiat, gain concessions from its unions and get debt holders to cut the amount owed by the company all by April 30.
If Chrysler can pull together all of the deals, the government has promised to provide $6 billion more in loans to help Chrysler survive until its cost-cutting can take effect and Fiat can bring vehicles to the U.S. Without a deal, the government said it would not even provide bankruptcy financing and Chrysler almost certainly would end up in liquidation.
But the debt holders deal and Fiat reports give new hope to the prospects of Chrysler surviving and preserving its 54,000 remaining jobs.
The head of the Italian metal workers union, Antonio Regazzi, said Tuesday that the deal with Chrysler s lenders clears the way for an alliance between the U.S. automaker and Fiat.
Fiat spokesman Gualberto Ranieri declined to comment on the possibility of a deal being near.