The Treasury Department reached an agreement with Chrysler's creditors late last night that might prevent the troubled automaker from going into bankruptcy, sources familiar with the matter said today.
The carmaker had owed a fractious group of 45 banks, hedge funds and other firms about $6.9 billion. These creditors have agreed to write down the debt to $2 billion.
The two sides had been far apart in the negotiations, leaving Treasury officials little choice but to prepare a bankruptcy filing. Indeed, one government official said last week that it would take a "miracle" for a deal to be worked out. But the lenders realized that they would have received far less in a bankruptcy and ceded to government demands.
Chrysler also reached a deal over the weekend with the United Auto Workers, in which the union would own a majority stake in the automaker.
A source familiar with the matter said if the restructuring of the storied American automaker is completed according to the tentative deal, the union would have a 55 percent stake in the company, the Italian automaker Fiat would eventually hold a 35 percent stake, and the government and Chrysler's lenders would share a 10 percent stake in the company. The source spoke on condition of anonymity because he was not authorized to comment publicly on the talks.
The agreement with the UAW, which must be ratified by union members, and the deal with the automaker's lenders are milestones in the effort to keep Chrysler and its 54,000 employees out of bankruptcy.
They come as the Obama administration seeks to make the automaker viable once again by stripping it of its overwhelming debt load and partially merging it with Fiat.
The agreement with the union essentially relieves Chrysler of a portion of the $10 billion it owes to the union's retiree health fund. In exchange for giving up its claims to some of that $10 billion, the union is getting the significant equity stake in the company.
Gary Chaison, professor of industrial relations at Clark University in Worcester, Mass., said that if the union winds up with a majority stake in its employer, that "puts the UAW in a strange position."
"If it takes company stock as a part owner in the company, it would be bargaining against itself," he said. "It can never act as adversarial in that relationship. Also it's in a position that to make the company more stable, it has to reduce health-care benefits of its own retirees."
Also yesterday, the German automaker Daimler said it has reached a deal to shed its remaining 19.9 percent stake in Chrysler. Daimler had previously written down the value of its Chrysler stake to zero.
Under the deal, Daimler will pay $600 million into Chrysler's pension plan over the next three years. Daimler will also surrender its claims to the loans it extended to Chrysler when it sold most of the company to Cerberus in 2007.