Banks Reject U.S. Terms for Cutting Chrysler Debt

By NEIL KING JR. and JEFFREY MCCRACKEN A group of big banks and other lenders rebuffed a Treasury Department request that they slash 85% of Chrysler LLC's secured debt, proposing instead to eliminate about 35% in exchange for a minority stake in the restructured car maker and a seat on its board. The lenders' counteroffer marks a significant act of brinksmanship as the banks and the Obama administration's auto task force duel over concessions to avoid liquidating the country's third-largest car company. Chrysler faces an April 30 Treasury deadline to seal an alliance with Italy's Fiat SpA that also requires concessions from lenders, as well as from the United Auto Workers union. Chrysler owes the lenders, which include Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had requested that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler. In their five-page counteroffer, which was sent to the Treasury late Monday, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a 40% equity stake and a Chrysler board seat, according to a copy of the proposal provided by individuals outside the lenders' group. The lenders also are demanding that Fiat pour $1 billion in capital into Chrysler in exchange for whatever equity stake it would gain. That could be a source of conflict with the Italian auto maker, which has said it instead wants to give Chrysler only technology. The Treasury shot back, making it clear that the government didn't plan to accept the lenders' proposed terms. "It is neither in the interest of Chrysler's senior lenders nor the country for them to advance a proposal that would yield them an unjustified return as Chrysler, its employees and other stakeholders are working tirelessly to help this company restructure," the Treasury said in a statement. "Our hope and expectation is that these lenders take a more constructive position in the coming days that reflects the actual situation that they and the company face," the statement continued. In making their case for a significantly smaller sacrifice than what the government wants, the lenders have argued that their fiduciary duty to their own shareholders and investors requires them to recoup as much as possible from the car maker. The lenders have told Treasury officials they believe they could recover at least 65% of their loans if Chrysler is liquidated in bankruptcy. In their counteroffer, the lenders blasted the government's proposal as unfair. They said it is "in no way a shared sacrifice." The lenders also questioned the logic of having Chrysler pair up with Fiat. The Italian company, they said, would bring "negative synergies for the first 3 years" and would enter the alliance with "limited downside for a deal of this size." Moreover, they said it could result in a "wealth transfer from the U.S. taxpayer to a foreign company of potentially $10 billion or more." The steering committee of banks that made the counterproposal holds more than 66% of the $6.9 billion owed Chrysler's lenders, said people familiar with the matter, giving the committee the requisite amount of debt to control the votes of lenders if Chrysler files for bankruptcy. Under U.S. bankruptcy code, holders of at least two-thirds of the amount owed a group of creditors must approve concessions. There also must be approval from a majority of total debt holders in a group. The committee has eight members. The largest bank-debt holders are J.P. Morgan, Citigroup, Goldman Sachs Group Inc. and Morgan Stanley. The four hold about $4.3 billion of the debt, said people familiar with the matter. Also on the committee are hedge fund Elliott Management, distressed-asset investor Stairway Capital Management, fund manager OppenheimerFunds and advisory and asset-management firm Perella Weinberg Partners. In all, an estimated 45 lenders and funds hold the Chrysler bank debt. The dispute is heating up as Steven Rattner and his team haggle in Washington with the heads of Chrysler, Fiat and the UAW over details of a Fiat alliance. The counteroffer also came about a week after the government presented Chrysler lenders with more than 60 pages of financial assumptions for a combined, restructured Chrysler. The government projects that Fiat-Chrysler wouldn't be able to start making payments on its debt until 2012, said several people familiar with the report. The government also assumes that the $4 billion it lent Chrysler largely will be wiped out, as will a combined $2 billion Chrysler owes Cerberus Capital Management LP and Daimler AG, Chrysler's last two owners. The government would then put in an additional $6 billion to fund the operations of Fiat-Chrysler. One assumption that upset some lenders was that Chrysler would pay about $3 billion total to a UAW retiree health-care fund in 2009 and 2010, said these people. The fund, which had been owed about $10 billion, would also get an unknown amount of equity in the new Chrysler. The fund had been owed about $10 billion from Chrysler, but it is behind the banks, Cerberus, Daimler and the U.S. in the order to be paid. Another contentious point with lenders was that Fiat was not putting in any money. The Italian automaker's most valuable contribution would be new fuel-efficiency technology and small-car platforms, said these people. "Fiat seemed to be getting a lot for not much," said one of these people. Lenders on the Chrysler bank-steering committee had originally hoped to make their counteroffer late last week, but differences of opinion between larger lenders like J.P. Morgan and Citi and the smaller bank-debt holders delayed the offer, said people familiar with the matter. The larger lenders were pushing for a counteroffer that was closer to the original government proposal than smaller lenders, such as hedge funds, were willing to agree to, said these people. This conflicting view is likely due to several things, such as the fact the larger banks bought or paid full price for billionsof Chrysler bank debt, while smaller holders bought theirs at a steep discount and would likely make a tidy profit even in a quick liquidation of Chrysler, said people involved in the talks. "Not everyone was on the same page. The big bank view was "hey guys, the offer back can't be outrageous. This is the government," said one of these people. "There were others, smaller lenders, who wanted to be a lot more aggressive." In the end, the big banks "came closer to the smaller lender view," said another person familiar with the talks. Write to Neil King Jr. at neil.king@wsj.com and Jeffrey McCracken at jeff.mccracken@wsj.com