Last week, in the post Chrysler/Fiat Update, I suggested that Chrylser’s debtholders would likely be better off with Chrysler in bankruptcy. I wrote:

Some creditors (e.g., secured bondholders debtholders) would likely be better off with Chrysler in bankruptcy than make the kinds of concessions that would allow the Fiat deal to go through.

For this reason, among a host of others, I concluded:

Chrysler now needs a miracle to survive.

Sure enough, as reported yesterday in the Wall Street Journal (see Banks Reject U.S. Terms for Cutting Chrysler Debt), Chrysler’s debtholders seem unwilling to make the necessary concessions.

A group of big banks and other lenders rebuffed a Treasury Department request that they slash 85% of Chrysler LLC’s secured debt, proposing instead to eliminate about 35% in exchange for a minority stake in the restructured car maker and a seat on its board.

The lenders’ counteroffer marks a significant act of brinksmanship as the banks and the Obama administration’s auto task force duel over concessions to avoid liquidating the country’s third-largest car company.

In their five-page counteroffer, which was sent to the Treasury late Monday, the lenders said they are prepared to cut Chrysler’s first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a 40% equity stake and a Chrysler board seat, according to a copy of the proposal provided by individuals outside the lenders’ group.

In making their case for a significantly smaller sacrifice than what the government wants, the lenders have argued that their fiduciary duty to their own shareholders and investors requires them to recoup as much as possible from the car maker. The lenders have told Treasury officials they believe they could recover at least 65% of their loans if Chrysler is liquidated in bankruptcy.

Tick, tick, tick. We are now one week from the government imposed deadline. And we aren’t any closer to a deal. Fiat wants the auto union and Chrylser’s creditors to grant more concessions. Chrylser’s creditors and the auto union do not seem particularly motivated to make such concessions. What’s more, they both want Fiat to put more skin in the game.

Looks like time for that miracle is running out fast. Now let’s see if the Obama administration has the fortitude to make good on its bankruptcy threat…

This entry was posted on Wednesday, April 22nd, 2009 at 6:47 pm and is filed under Bankruptcies, Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.