Big Banks Resist Call to Aid Chrysler

By JOHN D. STOLL, JEFFREY MCCRACKEN and KATE LINEBAUGH Banks that loaned Chrysler LLC $6.8 billion are resisting government pressure to swap more than $5 billion of that for stock to slash the car maker's debt, according to people familiar with the matter, hindering Chrysler's effort to restructure outside of bankruptcy court. The issue is also slowing the company's drive to cement an alliance with Fiat SpA by May 1, and stalling Chrysler's attempt to renegotiate a health-care agreement with the United Auto Workers union, according to these people. While significant work needs to be completed with the UAW and Fiat, people involved in the talks say the banks are striking a much tougher stance than the union or Fiat. The lenders, which include J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley, hold great influence in moving the process along. As holders of secured debt, they have the right to take control of Chrysler plants, brands and other assets, which were pledged as collateral for the loans, if the company files for bankruptcy protection. View Full Image Bloomberg News The Obama administration wants major banks to turn most of their $6.8 billion in secured Chrysler debt into stock in the ailing car maker, but they are resisting. Above, Chrysler's headquarters in Auburn Hills, Mich. As a result, Chrysler may be worth more to the lenders in a bankruptcy liquidation than if they agree to restructure the debt, and the government has less leverage to force the banks to make concessions. The negotiations show how the government's involvement in both banks and industrial companies is creating uncomfortable circumstances: The U.S. has given aid to some of the very banks that are demanding tough terms from Chrysler, also a recipient of government loans. J.P. Morgan, which has taken the lead in negotiations with the government, holds Chrysler debt in the range of $2.5 billion, said a person familiar with the matter. This person said the other lenders "don't have quite the same view" as J.P. Morgan on how hard to push back on granting concessions. The Obama administration has oversight of restructuring Chrysler and General Motors Corp. after the White House lent $17.4 billion to the two struggling car companies in December. As of Wednesday, the Treasury gave Chrysler 30 days to broker concessions with its debt holders, unions and Fiat, or face a potential liquidation in bankruptcy court. A key government demand centers on cutting Chrysler's debt. Chrysler "has a huge amount of debt for a company of that size," a senior administration official said. "The banks there have been absolutely resolute about not modifying that debt." Earlier in the year, Chrysler asked the banks to reduce the company's debt obligations by $3 billion. Now, the Obama administration is demanding that the lenders cut the debt by well in excess of $5 billion, an administration official said late Friday. The Treasury Department began talking with the banks on Wednesday. The bailout money these banks took from the Troubled Asset Relief Program "hasn't been mentioned, but everyone is aware that issue is there," said a person familiar with the talks. Each of the four banks declined to comment. Cerberus Capital Management LP, which controls Chrysler, and Fiat also declined to comment. In a statement, Chrysler said it is "committed to working closely with all constituents, the administration, U.S. Treasury and the [Obama auto] task force over the next 30 days to reach a successful conclusion." Chrysler's bank lenders say they would be in a stronger position than other stakeholders, including taxpayers, in bankruptcy court. Unlike with GM, where many of its bondholders hold debt that isn't secured by assets, almost all of Chrysler's debt is backed by its plants, equipment, patents and other holdings. That gives its senior-most lenders -- which have what is known as first-lien debt -- a strong legal position in bankruptcy. If Chrysler were to liquidate, billions of dollars in assets would be broken up and sold, with the first-lien lenders getting first dibs. J.P Morgan and other lenders are convinced they would have higher recoveries in a liquidation, compared to what the administration is asking them to accept now , said several people familiar with their thinking. The J.P. Morgan position, said these people, is that concessions by Chrysler's creditors should be treated as they would be in a normal bankruptcy -- meaning the billions of dollars of government debt and the UAW retiree health-care obligation should be wiped out before the secured lenders lose anything on their $6.8 billion. Some of the key lenders argue they can't accept the government's offer because they need to take care of their own shareholders as well as smaller Chrysler lenders that aren't directly involved in the talks. Cerberus and Daimler AG -- which hold $2 billion in second-lien debt owed by Chrysler -- already have agreed to exchange that debt for Chrysler equity. Other senior-secured lenders also appear willing to make concessions on Chrysler, say these people, but J.P. Morgan is "in control of the talks." Fiat, meanwhile, is open to a Chrysler bankruptcy filing if the Italian car maker can get a consensual agreement with at least some of the creditors, according to two people familiar with the matter. Under that scenario, a reorganization plan would be agreed upon by the Treasury, Chrysler, Fiat, the UAW and some of the creditors, with an understanding to proceed quickly enough to get Chrysler out of bankruptcy court in as little as 30 days. The concept, however, contains some risk because a bankruptcy judge could reject it, and allow pleadings by dissatisfied parties. That could lead to a different outcome. —Neil King Jr. contributed to this article. Write to John D. Stoll at john.stoll@wsj.com, Jeffrey McCracken at jeff.mccracken@wsj.com and Kate Linebaugh at kate.linebaugh@wsj.com