Four principal banks have agreed to accept $2 billion in cash from Chrysler for $6.9 billion in secured debt, but others are resisting the deal. (Bill Pugliano / Getty Images)
Washington -- Chrysler LLC could be forced to file for bankruptcy as early as this week, despite agreement by the automaker's major creditors to forgive much of its debt.
The White House praised the agreement, but it pointedly wouldn't rule out bankruptcy. "There's still some ways to go in these negotiations. So I wouldn't rule anything in or out," White House spokesman Robert Gibbs said Tuesday.
Four principal banks that hold about 70 percent of the automaker's secured debt, including J.P. Morgan, Citibank, Goldman Sachs and Morgan Stanley, have agreed in principle to accept $2 billion in cash for $6.9 billion in secured debt, according to people familiar with the matter.
But they said some other banks -- there are 46 in all -- are resisting the deal.
"Without having all 46 banks, it would still be necessary for Chrysler to go through what we call our 'surgical bankruptcy' -- 30-day type of process -- in order to in effect drag along any banks that choose not to participate," said a person familiar with the matter.
Still, the deal by creditors is a critical hurdle and could help Chrysler merge with Italian automaker Fiat SpA. It also increases the odds that Chrysler will not be forced into liquidation.
Without a deal, a majority of creditors could have kept Chrysler in bankruptcy for an extended period and sought to sell the automaker's assets to recover part of what is owed them.
Rebecca Lindland, an auto analyst with IHS Global Insight, said a "surgical" bankruptcy for Chrysler carries big risks.
"You don't want to elect bankruptcy if you don't have to," Lindland said. "Complications could arise and the patient starts crashing. It's a little na´ve to think bankruptcy is predictable."
One major outstanding issue is the future financing of Chrysler's vehicles. Treasury has loaned $1.5 billion to the company's financing arm.
The task force is exploring options, including infusing more money into Chrysler Financial or shifting some or all of Chrysler's auto loan business to GMAC LLC, General Motors Corp.'s financing arm.
A person familiar with the matter said it was unlikely that Chrysler Financial and GMAC -- both controlled by Cerberus Capital Management LP -- would merge in the short-term, if at all.
Chrysler faces a Thursday deadline to come up with a workable business plan that would convince the government to give it more financial aid.
The president's auto task force says Chrysler isn't viable as a standalone company.
"You could even argue that bankruptcy would be helpful from the jobs standpoint because the more liabilities we shed, the more profitable Chrysler will be and the more people it can employ," a person familiar with the matter said, rejecting the idea that a bankruptcy filing would lead to more job losses.
Chrysler, even in bankruptcy, could still complete a tie-up with Fiat. In Italy on Tuesday, Fiat Vice Chairman John Elkann did not rule out a deal with a bankrupt Chrysler.
When asked what Fiat's role would be should Chrysler be forced into bankruptcy protection, Elkann said that depended on what version of Chapter 11 bankruptcy protection was employed, the Associated Press reported. "There are lots of variations of Chapter 11. We need to be patient until Thursday."
In bankruptcy, Chrysler could more cheaply reduce its dealership network by cancelling dealer agreements and discharge other liabilities.
The U.S. Treasury would provide or guarantee up to $24 billion debtor-in-possession financing if it forces Chrysler to file for bankruptcy. That would allow Chrysler to continue operations as it reorganized under court protection.
Michigan lawmakers urged the remaining banks to agree to concessions.
Rep. Gary Peters, D-Bloomfield Township, urged the other banks and hedge funds to agree to the deal. While opposing bankruptcy, he said the UAW and creditor agreements were crucial to speeding a stay in court.
"The bankruptcy would be much shorter," Peters said.