Chrysler closes in on debt deal with bondholders

DETROIT -- Chrysler's bondholders are close to a final deal that would cut the automaker's debt by 72% and could clear the way for a partnership with Italian automaker Fiat.

The four largest bondholders have reached an agreement in principle to slash Chrysler's debt from $6.9 billion to just $2 billion and an undetermined equity stake, according to a source briefed on the deal who did not want to be identified because talks are not public. Debt reduction is one of the government requirements for more loans and a stumbling block that could keep the Chrysler/Fiat partnership from going through.

The four banks holding about two-thirds of Chrysler's debt are JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.

If remaining bondholders don't agree by Thursday, Chrysler's government deadline for completing the partnership with Fiat, the automaker could still end up in bankruptcy court, says the source. The company hopes, should that happen, it will get in and out in just 30 to 45 days.

The automaker has been quickly clearing hurdles to the Fiat deal. Last weekend, it successfully negotiated concession deals with the United Auto Workers union and Canadian Auto Workers. The government had been leaning on the UAW to bring labor costs in line with those of the foreign-owned auto plants in the U.S.

UAW President Ron Gettelfinger said in a statement Tuesday that coming to an agreement with Chrysler was "the most difficult and challenging situation that we've found ourselves in, probably in the history of our union."

The UAW has just through today to get the contract changes ratified by its members. Gettelfinger says he's confident the members will vote for the agreement because they want to avoid a Chrysler bankruptcy.

Van Conway, a restructuring expert at Conway MacKenzie and Dunleavy in Detroit, says he's optimistic the bondholder agreement will keep Chrysler out of bankruptcy. Bankruptcy would "diminish the value" of Chrysler, making it harder for holdout bondholders to get anything more.