Report: Chrysler lenders offer to swap $2.5B for equity

DETROIT -- Banks and hedge funds that hold $6.9 billion in Chrysler debt have proposed forgiving $2.5 billion of it in exchange for about a 40% stake in a Chrysler-Fiat alliance, according to two people briefed on the proposal.

One of the people said the lenders delivered their counterproposal to Chrysler and the U.S. Treasury Department late Monday night. Neither person wanted to be identified because the negotiations are private.

The counteroffer comes as Chrysler races to meet a government-imposed April 30 deadline to swap debt for equity, cut labor costs and negotiate an alliance with Italy's Fiat Group. If it misses the deadline, government aid will end and Chrysler likely faces liquidation.

Last week, creditors rejected a Treasury Department offer to reduce the debt to $1 billion, absolving Chrysler of about 85% of its secured loans. The counteroffer, which would swap about 35% of the debt for equity, falls short of government restructuring goals that called for Chrysler to retire at least two-thirds of its debt.

Messages were left with spokeswomen for the Treasury Department and Chrysler.

Chrysler is living on $4 billion in federal loans and could get another $500 million to survive through April. But without massive restructuring and a Fiat deal, government officials have said they won't lend the struggling automaker any more money.

The counteroffer from a steering committee would give the equity stake to first-lien lenders including Citigroup, JPMorgan Chase, Goldman Sachs Group, Morgan Stanley and several smaller banks, plus some hedge funds. Chrysler has about 45 first-lien lenders who would be first in line to get money if the company's assets were liquidated.

"The goal is something close to 40% of the equity" in the combined Chrysler-Fiat company, according to one of the people briefed on the lenders' proposal. "Taking equity is a risky proposition," the person said.

When the Bush administration agreed to give Chrysler and General Motors loans last year, they set targets for the companies to swap two-thirds of their debt for equity. The Obama administration has been less clear about how much debt must be exchanged, saying in a March 30 statement that Chrysler must have a "sustainable debt burden."