DETROIT — The Treasury Department is directing Chrysler to prepare a Chapter 11 bankruptcy filing that could come as soon as next week, people with direct knowledge of the action said Thursday.
The Treasury has an agreement in principle with the United Automobile Workers union, whose members’ pensions and retiree health care benefits would be protected as a condition of the bankruptcy filing, said these people, who asked for anonymity because they were not authorized to discuss the case.
Moreover, Fiat of Italy would complete its alliance with Chrysler while the company is under bankruptcy protection.
The only major question that remains unresolved is what happens to Chrysler’s lenders, who hold $6.9 billion in company debt. The government’s most recent offer, presented Wednesday, would give the company’s lenders about 22 cents on the dollar, or $1.5 billion, and a 5 percent equity stake in a reorganized Chrysler. Earlier this week, a steering committee of the lenders proposed that they receive 65 cents on the dollar, or $4.5 billion, and a 40 percent equity stake.
If no agreement is reached between the government and Chrysler’s lenders, a nasty legal fight could emerge in bankruptcy. The creditors’ claims are backed by most of the company’s collateral, including plants, brands and equipment, and the senior lenders will argue that they have first claim on those assets — even over and above the government’s debt.
"In a negotiation like this, everything is speculation until there’s a deal,” said an administration official who did not want to be named because the talks are private. “It should surprise no one that the administration is planning on contingencies, but we remain focused on the goal and engaged with all stakeholders to bring Chrysler and Fiat to a working partnership.”
A Treasury spokeswoman declined to comment.
A bankruptcy filing by Chrysler would be the first among Detroit’s troubled automakers, who have been mired in a devastating sales slump since last fall. Treasury is also working with General Motors to prepare a possible bankruptcy case, and the terms of a Chrysler filing might offer a glimpse into the shape of G.M.’s own filing.
Some analysts questioned whether the Treasury’s steps to prepare a bankruptcy case were an effort to put more pressure on lenders, with which it has exchanged proposals meant to reduce Chrysler’s debt. Chrysler faces an April 30 deadline from the Treasury, while G.M. faces a June 1 deadline in its own efforts to draft a new restructuring plan.
Under the most likely assumptions, Treasury will provide the financing that Chrysler needs to operate while under bankruptcy protection. The Canadian government is also expected to participate in backing the company.
The Globe and Mail of Toronto reported the Canadian government’s role on Thursday.
Last month, the Obama administration told Chrysler it would provide up to $6 billion in financing if Chrysler and Fiat could complete a deal by the end of this month. Fiat originally agreed to take 35 percent of Chrysler, but the stake was subsequently reduced to 20 percent. The administration said it would provide up to $6 billion in financing if the two companies agreed, on top of $4 billion in federal assistance that Chrysler has already received.
Although the two companies have been holding discussions on an out-of-court agreement, a bankruptcy case would allow Fiat to more easily select the assets of Chrysler that it wants to preserve, such as dealerships, factories and the company’s product development operations, these people said. The approach, which relies upon Section 363 of the federal bankruptcy code, is somewhat similar to what the government is planning in the case of G,M..
Then, Chrysler could sell or jettison any assets it does not want to keep, and cancel franchise agreements with superfluous car dealers.
“Chrysler has consistently said that its viability will be enhanced through an alliance with Fiat, as it represents a change in the company’s business model that expands its global competitiveness,” said Lori McTavish, Chrysler’s vice president of communications. “As we move forward in this process, we believe it’s important to keep all options open.”
Ms. McTavish said Chrysler would continue to work through the end of the month, based on direction given by the President’s auto task force, “to secure the support of the necessary stakeholders and reach a successful conclusion that the administration and U.S. Treasury deems appropriate.”
The U.A.W., Chrysler and Treasury have reached agreements in principle that would protect workers’ benefits, people with knowledge of the negotiations said, and a similar agreement is expected to be reached as soon as this weekend with the Canadian Auto Workers union.
Once Chrysler emerges from bankruptcy protection, it would largely be owned by Fiat, the U.A.W., the Treasury and its lenders, these people said. A bankruptcy filing would likely wipe out existing equity stakeholders, notably Cerberus Capital Management, which took over the carmaker from Daimler in 2007.
Ron Gettelfinger, the U.A.W.’s president, issued a statement on Wednesday saying that the union was “continuing to work toward an agreement that will be in the best interest of Chrysler workers, retirees and the communities where the company does business.”
People close to the talks said Wednesday that the U.A.W. had tentatively agreed to accept Chrysler stock to finance half of the company’s $10.6 billion obligation to the health care trust. The balance would be paid in cash over the next decade. That money presumably could come from either the Treasury, or from Chrysler’s profits, once it emerges from bankruptcy protection.
Chrysler has a $9.3 billion pension shortfall, or 34 percent of its total liability, according to the Pension Benefit Guaranty Corporation. The agency said earlier this month that it would assume $2 billion of the shortfall in the event Chrysler terminates its pension plans.
If that happened, retirees would receive sharply lower benefits than they normally would expect. But Chrysler is not obligated to terminate its pension plans while in bankruptcy, particularly if it received federal assistance to fund them.
It was not clear Thursday where Chrysler would file its bankruptcy case. On Wednesday, Mike Cox, the attorney general of Michigan, urged General Motors and Chrysler to consider filing in the state, rather than Delaware or New York. He said a locally administered case would be more convenient for creditors in Michigan.