Key Lenders Agree to Chrysler Debt Swap

By NEIL KING JR., JOHN D. STOLL and NEAL E. BOUDETTE Chrysler LLC moved a step closer to a historic reorganization after key banks and lenders agreed in principle to a debt-for-cash swap two days before a government-imposed deadline. Lenders, in a deal driven by the U.S. Treasury Department, agreed to accept $2 billion in cash in exchange for the $6.9 billion in secured debt they now hold. The pact is not yet final because some lenders involved oppose the terms. The tentative debt-swap agreement by large lenders including J.P. Morgan Chase & Co. and Citigroup Inc. followed the auto maker's landmark accord that would give the United Auto Workers union a 55% stake in the company in return for wage and benefit concessions. Obama Administration Effort To Save Chrysler In Home Stretch 1:42 The next 48 hours will determine whether the Obama Administration's last-ditch efforts to stave off bankruptcy will succeed, WSJ's Neil King reports. Deals with lenders, the UAW and Fiat need to be signed and sealed to save the Detroit company. If that deal is ratified by union workers Wednesday, Chrysler would ask Italy's Fiat SpA to finalize an alliance that would meet U.S. requirements to release $6 billion in new bailout loans. All three must be achieved Thursday to meet a government-imposed deadline for Chrysler to prove its viability. Chrysler may still file for bankruptcy protection, people familiar with the matter said. Some hedge funds and smaller banks also said they wouldn't back the deal. Those people said three of the bank-debt holders have said they would not support the deal and would advise other lenders to oppose it. One of the lenders from among those opposing the deal said the group sees the deal as providing preferential treatment for junior lenders. A further complication is the fate of Chrysler's financing arm. Chrysler Financial has been surviving this year on about $150 million a week in government loans. The U.S. is encouraging the merger of Chrysler Financial's loan portfolio into GMAC LLC., both owned by Cerberus Capital Management LLC. Whatever happens, the restructurings of Chrysler and rival General Motors Corp. mark an extraordinary turning point for the U.S. auto industry. For the last 100 years, Detroit has reigned as the center of the automotive universe, and the U.S. as the biggest and most important market. That long run is now coming to an end. "It's a pretty safe bet that Detroit is not going to be Motown in the very near future," said John Heitmann, a professor at the University of Dayton who studies the auto industry. At the same time, the U.S. market is losing its allure. Over the last 20 years, foreign auto makers invested billions of dollars to build and expand plants here because the U.S. market was the largest in the world and appeared headed for steady growth. Some auto makers assumed U.S. auto sales would soon rise to 20 million vehicles a year. The recession has changed all that. As soon as this year, the U.S. could be supplanted by China as the world's largest market, and within a few years the industry could be selling nearly as many cars in India as in the U.S. "The U.S. is mature," said Jerome B. York, an auto-industry veteran and advisor to billionaire investor Kirk Kerkorian. The auto industry's center of gravity, he added, "is shifting from the U.S. to Asia." To be sure, Detroit and the U.S. will remain important and influential to the world's auto industry. But its days atop the global industry are fast winding down. For Chrysler, two big hurdles remain to be cleared before the administration feels confident that it can wash Chrysler through bankruptcy and move ahead with additional financing for the company. The government has promised to provide Chrysler as much as $6 billion on top of the $4 billion in loans already received. The first hurdle is for Fiat to sign off on the overall deal. But all parties, including the administration, appear confident that the Italian carmaker will make that move by Thursday. On Tuesday, Fiat Vice Chairman John Elkann said, "The partnership can proceed even if we have to deal with Chapter 11." Asked whether the UAW's potential stake could undermine Fiat's influence over the alliance, he said the final shareholding structure is still being discussed. "There are several negotiation tables," Mr. Elkann said. Mr. Elkann said Fiat won't invest any money in Chrysler as part of a potential deal. However, he opened the door to the possibility that Fiat could eventually put money into Chrysler once an alliance is forged. Fiat is being asked to take what one individual familiar with the negotiations called "a relatively small position" in Chrysler to start. That stake, estimated at about 20%, would rise as Fiat introduced new technologies to Chrysler and met certain, as-yet unspecified obligations. The second obstacle -- what to do with Chrysler's troubled financing arm, Chrysler Financial -- may be more significant. Chrysler Financial has been surviving since the end of 2008 on about $150 million a week. The administration is trying to work out a deal that would essentially fold Chrysler Financial's loan portfolio into GMAC, a Cerberus Capital Management LP owned financing arm, which would then become the main lender to both Chrysler and GM dealers. On Monday, Chrysler reached a deal with the UAW that gives the union a 55% stake in the planned Fiat-Chrysler partnership in exchange for reduced cash payments to the union's retiree health-care trust fund. —Jeffrey McCracken, Stacy Meichtry and Alex P. Kellogg contributed to this article.