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Chrysler and Its Bankers in a Standoff

Chrysler, the U.S. Treasury Dept., and banks are in a standoff befitting one of Clint Eastwood's spaghetti westerns.

Last week, Chrysler's lenders rebuffed an offer from the Treasury to take $6 billion of the $7 billion Chrysler owes the banks in stock and the remaining $1 billion in new secured debt, according to people familiar with the situation. If Chrysler can't negotiate its debt down—and obtain further concessions from the United Auto Workers—it can't seal a deal to tie up with Italy's Fiat (FIA.MI). And without Fiat in the picture, Treasury won't give Chrysler $6 billion in government loans that the company needs to avoid bankruptcy. Treasury is heavily involved in the talks. Treasury officials made the proposal directly to the banks and drew a hard line that they will not budge on the amount of cash and equity that's offered, say sources familiar with the negotiations.

The parties have the rest of the month to clear the standoff, or Treasury will withhold further funds and Chrysler—if the company runs out of money—could file for bankruptcy. Right now, talks continue between Chrysler, owner Cerberus Capital Management, Treasury officials, and a group of lenders—which includes JPMorgan Chase (JPM), Citigroup (C), Morgan Stanley (MS), and Goldman Sachs (GS)—to turn most of their $7 billion in loans into stock in the company. Chrysler needs big union concessions, too.

It may take until the end of the month, when all parties face a deadline that could mean bankruptcy. Chrysler is keeping mum on negotiations with the banks or its unions. "We have good discussions going on with all constituents," Chrysler President James E. Press said in an interview. "We're hopeful."

Big Decision for the Banks

On Mar. 31, the Treasury Dept. gave Chrysler 30 days to seal its deal with Fiat. To do that, Fiat wants Chrysler to clean up its balance sheet. And to do that, Chrysler must negotiate away most of its bank debt and get the union to accept half of the $10 billion the automaker owes the union in stock and the rest in cash.

For the banks, the key decision comes down to whether they think they can recoup more of their $7 billion in loans to Chrysler by taking stock in the company or by selling off pieces of Chrysler. If they accept the shares, they would become owners in Chrysler along with Fiat, possibly the federal government, and the union, which would take a chunk of stock to start a trust fund that will pay union health-care benefits. Fiat would own 20% and could take as much as 49% later, once government loans are repaid. Cerberus has offered to write down its equity stake, and the private equity giant would then no longer own the carmaker.

For the banks, both options are dicey. If the banks take stock, they are gambling that a Chrysler-Fiat deal will work and that the two regional carmakers can thrive with a successful merger.

Breaking Up the Company

The banks could let Chrysler enter bankruptcy and try to get proceeds from selling the Jeep brand and other Chrysler plums, such as its minivan and Dodge Ram pickup businesses, as well as the factories. But that's a tough sell when automakers around the globe are reeling from a plunge in auto sales and have neither the cash to do deals nor the need for more factories and brands.

"They have to choose the least bad option," says John A. Casesa, principal of Casesa Shapiro Group, an auto consulting firm in New York. "That may be taking equity in Chrysler. You'd probably have a higher chance of recovery in a combined Chrysler-Fiat than in liquidation."

With few buyers for auto companies or assets, it's tough to say how much the banks could get. "No one knows in this market what these things are worth," says Thomas T. Stallkamp, former Chrysler president and a partner in private equity firm Ripplewood Holdings. "There is still way too much manufacturing capacity, so these are not terribly attractive assets in this economy."

Rebranding Fiat Models?

Even though there's no certainty of a deal, Chrysler is in the early stages of brainstorming which Fiat cars it could sell in the U.S. and under what brand names. Chrysler would also give Fiat some of its trucks, SUVs, and minivans to sell overseas, Press said.

At the New York Auto Show on Apr. 8, Press drove onstage in a Fiat 500, a tiny car that competes with BMW's Mini Cooper in Europe. Chrysler could sell the pint-size ride at its dealerships and just call it the 500—without a Chrysler or Fiat brand name, Press says.

Chrysler is also eyeing Fiat's stylish Alfa Romeo brand for the U.S. Alfa cars would probably be sold under the storied Italian brand, he said. "It's a great name," Press said. "Regardless of what we do with branding, the Alfa cars would keep the name and be sold at specialized dealers."

It all sounds good on paper. But first, Chrysler and the Treasury need to get the union and banks to budge.

Welch is BusinessWeek's Detroit bureau chief. Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

David Kiley is a freelance writer based in Ann Arbor, Mich.
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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