The U.S. Treasury has reached an agreement in principle with Chrysler LLC's first-lien lenders that may help the troubled automaker avoid bankruptcy, two people briefed on the discussions said on Tuesday.
The terms of the high-stakes debt restructuring deal were not immediately available, and representatives of Chrysler, the lenders and the Treasury could not be immediately reached for comment.
Chrysler's lenders, owed $6.9 billion in secured loans, have agreed to write down the debt to $2 billion, the Washington Post reported earlier on Tuesday.
The news comes as Chrysler races to meet a deadline of April 30 to complete an alliance with Italy's Fiat SpA and follows an announcement by Chrysler that it has also reached an agreement with the United Auto Workers leaders to modify the union's labor contract and to reduce the amount that the company owes a retiree health fund.
The negotiations between Chrysler's lenders and the UAW had played out in parallel because creditors were wary of the risk that the Obama administration's autos task force would try to force a settlement that favored the union.
The committee of Chrysler's lenders including JPMorgan Chase & Co, Goldman Sachs Group Inc, Morgan Stanley and Citigroup Inc last week proposed taking $3.75 billion in debt and a 40 percent equity stake in a restructured company.
That was above an offer of $1.5 billion in debt and a 5 percent equity stake from Treasury Department officials.
U.S. officials had been expected to make a new offer on Monday to the lenders' group representing about 45 institutions, including some hedge funds, that hold the secured debt of the struggling automaker.
In contrast to the banks, some of the funds had held out for a higher settlement and had argued that Chrysler's secured debt had to be paid out at a higher return than what was offered to the UAW for its unsecured healthcare-related claim.
That stance had come under fire from members of the Michigan congressional delegation and Michigan Gov. Jennifer Granholm who said the creditors were holding out for an unfair payout that threatened to bankrupt Chrysler and scuttle its planned alliance with Fiat.
Over $4 billion of Chrysler's total first-lien debt is still held by the major banks led by JP Morgan, people familiar with the matter have said.
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.
(Reporting by Poornima Gupta and Jui Chakravory; writing by Kevin Krolicki)
(Reporting by Poornima Gupta, editing by Gerald E. McCormick)