Banks 'resisting bid to cut Chrysler debt'

Chrysler’s lenders are resisting efforts to convert most of the car maker’s debt to equity, it was reported today.

The conversion is vital for Chrysler’s plan to restructure without filing for bankruptcy protection.

Banks including JPMorgan Chase, Goldman Sachs, Citigroup and Morgan Stanley lent Chrysler $6.8bn in 2007 when Cerberus Capital Management acquired an 80.1% stake in the firm.

Now, Chrysler needs to swap five billion dollars of that debt for equity in the car maker, as part of the plan for the company to become viable, The Wall Street Journal said, citing people familiar with the talks.

The banks’ reluctance is slowing Chrysler’s efforts to reach a definitive deal on an alliance with Fiat and also stalling the company’s attempt to reach a health care agreement with the United Auto Workers union, the Journal said.

A Citigroup spokeswoman declined to comment and messages seeking comment were left for the other banks.

Chrysler released a statement saying it “is committed to working closely with all constituents, the administration, US Treasury and the (government’s auto) task force over the next 30 days to reach a successful conclusion”.

Because the banks hold debt secured by collateral, they have the right to take Chrysler plants and assets if the company files for bankruptcy protection. That means they may be better off with what is left of Chrysler in liquidation than what they would get if they agreed to restructure the debt.

The government has little leverage to force the banks to make concessions if they believe they will be better off in bankruptcy court.

But the banks that are pushing back against Chrysler and the government are also the direct recipients of government aid through the banks’ own bailouts.

One person familiar with the matter said the four banks have had senior people involved in talks with the treasury during the last two days.

Chrysler also owes money to Cerberus and Daimler, but they already have agreed to exchange all that debt for Chrysler equity. Other lenders also appear willing to make concessions, but JPMorgan is leading the negotiations with the treasury, the Journal reported.

Chrysler and General Motors have received a combined $17.4bn from the government to keep them alive amid the worst US car sales market in 27 years.

On Monday, President Barack Obama announced that the companies’ plans to become viable and repay the loans were insufficient.

The government gave Chrysler 30 days to show it was deserving of more government help by securing a definitive deal with Fiat and getting further concessions from debtholders and the UAW.

GM has 60 days to satisfy the government or face bankruptcy.