Four Days of Crunch Time for Chrysler

Negotiations among Cerberus Capital, the White House, and banks heat up as the automaker reaches an agreement with the United Auto Workers

As the days dwindle down to Chrysler's Apr. 30 deadline to show the federal government it has a new plan for financial viability—or face bankruptcy re-organization—the automaker made great strides over the weekend by striking deals with the Canadian Auto Workers and United Auto Workers that will satisfy the White House auto industry task force.

But there has been less movement between Chrysler and its banks that hold $6.9 billion of the automaker's debt. The White House is looking for the lenders to take between $1 billion and $1.5 billion, write down the rest, and perhaps accept between a 5% and 10% equity stake. The banks have been looking for more like $4.5 billion and a 40% stake.

That gap led one executive briefed on Chrysler's negotiations to speculate there was still a 50% likelihood the automaker would face reorganization under Chapter 11 bankruptcy after the White House's deadline passes. If Chrysler can't make a deal with its banks by then, the White House has said it will not lend the automaker any more money. It has already lent Chrysler $4.5 billion since December to continue operating. Without additional government loans, Chrysler will be out of working capital and would be forced to file for bankruptcy.

White House senior economic adviser Larry Summers said on Fox News Sunday that the Obama administration was still hopeful that the parties could come to agreements before the deadline and avert bankruptcy, which could seriously impair consumer confidence in Chrysler's products. "There are some issues that have been worked out and some issues that remain to be worked out," Summers said.

The deal with the UAW—which shaves $100 per car in labor costs and gives the union an equity stake in Chrysler in exchange for cutting in half the $8 billion Chrysler owes the UAW for future health-care benefits—is significant. The union and secured lenders had been holding out on reaching an agreement because neither wanted to let the other get a better deal. Bankers in particular had complained that the union was being offered 50% of what they are owed, while the lenders were expected to take 30 cents on the dollar or less.
Fiat's $10 billion in technology

Sitting on the sidelines is Italian automaker Fiat (FIA.MI), which is ready to infuse Chrysler with roughly $10 billion in technology—vehicles and engines that Chrysler can adapt to sell as Chryslers, Jeeps, and Dodges—but no cash. If the White House signs off on whatever agreement the automaker can reach with the banks and unions this week, it promises to lend Chrysler $6 billion more, and the alliance with Fiat, which expects to get 20% equity, would kick in.

But because the banks are so far from agreeing, and the White House is loath to see Chrysler slip into an abyss of liquidation, sources close to the negotiations say to watch for the Obama Administration to find a third solution: providing Chrysler with some capital to emerge from bankruptcy, rather than liquidate the company.

The wild card in that plan is how a judge would treat the banks whose loans are secured by hard assets. Traditionally, those debt holders get the best treatment in a Chapter 11 proceeding. But a judge has a lot of discretion.
Offers and counteroffers are flying

If assets such as Jeep are auctioned off to settle the banks' debts, there may not be much of a company left for Fiat to partner with unless it shapes a new Chrysler out of the scraps and rubble of the company in a liquidation process.

Offers and counteroffers between the White House and the banks to save Chrysler in some form will be flying back and forth over the next four days.

The White House is determined to save jobs at Chrysler and at auto supplier companies that could fall into bankruptcy should Chrysler go under. Unless they are propped up, failure for those suppliers could seriously impact General Motors (GM), as well as Ford (F) and several foreign automakers that manufacture in the U.S.

The last thing the White House wants to see is a Chrysler bankruptcy trigger a domino effect that could put Ford—which hasn't taken any government loans and is poised to prosper in the next few years—into bankruptcy. GM faces its own deadline at the end of May to cut enough costs to qualify for more taxpayer loans or face bankruptcy.