Chrysler could file bankruptcy next week

By Micheline Maynard and Michael J. de la Merced

updated 7:06 p.m. ET April 23, 2009

DETROIT - The Treasury Department is preparing a Chapter 11 bankruptcy filing for Chrysler that could come as soon as next week, people with direct knowledge of the action said Thursday.

The Treasury has an agreement in principle with the United Automobile Workers union, whose members’ pensions and retiree health care benefits would be protected as a condition of the bankruptcy filing, said these people, who asked for anonymity because they were not authorized to discuss the case.

Moreover, Fiat of Italy would complete its alliance with Chrysler while the company is under bankruptcy protection.

The only major question that remains unresolved is what happens to Chrysler’s lenders, who hold $6.9 billion in company debt. The government’s 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.

If no agreement is reached between the government and Chrysler’s lenders, a nasty legal fight could emerge in bankruptcy. The creditors’ claims are backed by most of the company’s collateral, including plants, brands and equipment, and the senior lenders will argue that they have first claim on those assets — even over and above the government’s debt.

"In a negotiation like this, everything is speculation until there’s a deal,” said an administration official who did not want to be named because the talks are private. “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.”

A Treasury spokeswoman declined to comment.

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A bankruptcy filing by Chrysler would be the first among Detroit’s troubled automakers, who have been mired in a devastating sales slump since last fall. Treasury is also working with General Motors to prepare a possible bankruptcy case, and the terms of a Chrysler filing might offer a glimpse into the shape of G.M.’s own filing.

Some analysts questioned whether the Treasury’s steps to prepare a bankruptcy case were an effort to put more pressure on lenders, with which it has exchanged proposals meant to reduce Chrysler’s debt. Chrysler faces an April 30 deadline from the Treasury, while G.M. faces a June 1 deadline in its own efforts to draft a new restructuring plan.

Under the most likely assumptions, Treasury will provide the financing that Chrysler needs to operate while under bankruptcy protection. The Canadian government is also expected to participate in backing the company.

The Globe and Mail of Toronto reported the Canadian government’s role on Thursday.

Last month, the Obama administration told Chrysler it would provide up to $6 billion in financing if Chrysler and Fiat could complete a deal by the end of this month. Fiat originally agreed to take 35 percent of Chrysler, but the stake was subsequently reduced to 20 percent. The administration said it would provide up to $6 billion in financing if the two companies agreed, on top of $4 billion in federal assistance that Chrysler has already received.

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