WASHINGTON — Chrysler's path to recovery cleared a major roadblock ahead of Thursday night's government-imposed deadline when the struggling automaker's largest bondholders agreed to significantly reduce its debt.
The tentative bondholder deal reached Tuesday and a ratification vote today by the United Auto Workers on a new labor pact increase the likelihood that Italian automaker Fiat will buy Chrysler and save it from financial collapse.
"I don't think there's any major roadblock preventing a Fiat deal anymore," said Aaron Bragman, an auto industry analyst at IHS Global Insight.
But even if Fiat snaps up Chrysler, the Auburn Hills, Mich., company may still enter government-backed bankruptcy to resolve some of its toughest outstanding issues, including a dramatic reduction of its 3,300 U.S. dealers. Furious negotiations continue between members of President Obama's auto task force, Fiat and other parties as they try to steer clear of bankruptcy, which administration officials worry could scare away car buyers.
"If there's a way to avoid bankruptcy that is consistent with the president's goals and commitments, then we will do that, but I don't know at this moment which way that will end up falling," said a person familiar with the negotiations who was not authorized to speak publicly. "A quick, surgical bankruptcy might be the best way."
Although some major hurdles remain in satisfying the administration's demands by the deadline, one major item was crossed off the list Tuesday: a significant cut in Chrysler's roughly $6.8 billion in debt, which the company needed to do if it wanted at least $6 billion more in government support.
The Treasury Department reached a preliminary deal Tuesday with the four major holders of that debt -- Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley.
The deal calls for all of Chrysler's bondholders to swap the $6.8 billion they are collectively owed for $2 billion in cash when a Fiat deal closes, according to the person familiar with the talks. The four banks together hold about 70% of Chrysler's secured debt.
"We're pleased with the steady progress that's being made, but mindful that we still have some ways to go in order to ensure that the merger gets done," White House Press Secretary Robert Gibbs said.
Obama's auto task force rejected Chrysler's viability plan last month, determining it could not survive as a stand-alone company and did not merit additional government money unless it found a partner. Chrysler and its financing arm had received $5.5 billion but needed more.
Obama gave the company 30 days to work out a deal with Fiat or face liquidation. A significant reduction in the money Chrysler owed to creditors and union retirees is crucial to that deal.
On Sunday, Chrysler and UAW leaders reached a deal that would make the union's trust for retiree benefits the majority shareholder in the new Chrysler, with a 55% stake. With Chrysler executives largely on the sidelines, government negotiators also have been wrestling with debt holders over how much money they would get.
The two sides had appeared far apart. Administration officials last week offered $1.5 billion and a 5% equity stake in Chrysler. The banks and other bondholders reportedly countered with $3.75 billion for 40% of Chrysler. The deal reached Tuesday includes no equity stake.
But to avoid a bankruptcy proceeding, the other 42 debt holders, which include hedge funds and investment firms, would have to sign on to the deal.
Obama administration officials have significant clout with the large banks, all of which have received government bailout money. The other debt holders might be harder to sway, analyst Bragman said.
Michigan lawmakers increased pressure on the remaining debt holders to agree to the deal. "If they fail to do so, bankruptcy would be worse for them economically, and a risk to this vital new alliance of car companies," 11 members of Congress from the state warned in a joint statement Tuesday.
Rep. Gary Peters, a Michigan Democrat whose district is home to Chrysler headquarters, said he was "cautiously optimistic" that the company could stay out of bankruptcy. But if it does go that route, the accelerated pace of negotiations in recent days has convinced him that a court proceeding would be less onerous.
"Now that Chrysler has cut a deal with the UAW and a majority of their creditors, should bankruptcy occur . . . it should be a shorter, quicker bankruptcy with a lot less uncertainty," Peters said.
Spokesmen for some of the remaining debt holders -- including Elliott Management, Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital Management -- declined to comment.