Chrysler lenders offer to cut debt, take stock

DETROIT/NEW YORK (Reuters) - Chrysler LLC's first-lien lenders have offered to take equity in a restructured automaker allied with Fiat SpA in exchange for writing off about 35 percent of the $7 billion they are owed, according to people with knowledge of the closed-door talks.

Under the terms of the counter-offer conveyed to the U.S. Treasury on Monday, the lenders would retain about $4.5 billion in debt and take a stake of more than a third of a new Chrysler supported by new U.S. government investment and a ground-breaking deal with Fiat.

That would mark a much richer payout than U.S. officials first offered the banks that helped finance Chrysler's 2007 sale to private equity firm Cerberus Capital Management .

The gap underscores the tension between a diverse group of creditors, including more aggressive funds, and the government officials dictating turnaround terms for Chrysler with just nine days before a deadline for the No. 3 U.S. automaker to complete its restructuring talks.

Rep. Gary Peters, a Michigan Democrat whose district includes Chrysler's headquarters, called the counter-offer "an affront to taxpayers."

"This is not a serious counter-offer," Peters said in a statement. "These debt holders were offered fair market value for the debt, and the banks have responded by asking for a windfall."

The Obama administration's autos task force had proposed that creditors write off $6 billion of what they are owed, a proposal that would have left the group of institutional creditors holding about $1 billion in Chrysler debt. That would represent a write-down of 85 percent of the loan value.

The Chrysler counter-offer including equity would allow the roughly 45 banks and funds that hold Chrysler debt to benefit from investment gains if it succeeds in a restructuring that could see operational control shift to Fiat Chief Executive Sergio Marchionne.

Chrysler has been kept afloat with $4 billion in federal loans since the start of the year and could get another $500 million before its month-end restructuring deadline established by the autos task force.

The task force, which is headed by former investment banker Steve Rattner, has said it is willing to invest another $6 billion in Chrysler if the struggling automaker can complete the Fiat alliance and agreements to cut debt and costs with its creditors and major unions.

DEADLINE LOOMS

Chrysler has about $7 billion in first-lien loans that stem from its breakaway from Daimler AG in 2007. Daimler still holds a stake of nearly 20 percent in Chrysler although it has written down that investment to zero.

Chrysler, which is now 80-percent owned by Cerberus, lost $8 billion in 2008 and has warned that it could be forced to liquidate in bankruptcy without new funding.

A liquidation would split off stronger assets like Jeep and Chrysler's minivans while shutting factories and dealerships and eliminating thousands of jobs, analysts have said.

But Chrysler's first-lien creditors could still be paid out at a higher rate than the 15 cents on the dollar they were first offered by U.S. officials earlier this month.

Ratings agency Moody's Investors Service on Tuesday cut its rating to Chrysler to C, saying it was certain that the automaker would restructure its debt in a way that would be tantamount to default or that it would file for bankruptcy.

It said creditors could look to recover 20 cents on the dollar in a default, down from an earlier estimate of 50 cents, because of the decline in the U.S. auto industry.

Other aspects of Chrysler's debt restructuring talks include the United Auto Workers. The automaker has asked the union to take stock in payment for over $10 billion it owes to a retiree health care trust fund.

Cerberus has offered to write off its own $500 million in loans to Chrysler.

The steering committee of Chrysler lenders includes JPMorgan Chase & Co , Goldman Sachs Group , Morgan Stanley , Citigroup . It was broadened to also include Oppenheimer Funds, Stairway Capital Management, Elliott Management and Perella Weinberg Partners.

Peters and other critics have argued that the major banks that hold the majority of Chrysler's debt were in no position to insist on a higher payout from the government since they too have taken emergency funding from the U.S. Treasury.

(Reporting by Jui Chakravorty, Kevin Krolicki, John Crawley and Kevin Drawbaugh; Editing by Tim Dobbyn)