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Deal with creditors may let Chrysler veer out of bankruptcy

The automaker's future, dismal as of last week, is brighter as creditors agree to swap $6.9 billion in debt for $2 billion in cash.

By / April 28, 2009

A Chrysler-made PT Cruiser passes a Chrysler dealership in Los Angeles. The automaker, seen to be on the brink of bankruptcy last week, recently brokered new deals with labor and creditors.

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Chrysler may be getting a new lease on life.

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First came a deal over the weekend with the United Auto Workers to cut labor costs. Now comes word that the company has struck a deal with creditors to lighten its debt burden.

Coupled with a still-pending alliance with Fiat, the moves may be enough to help the smallest of the Detroit Three carmakers avoid bankruptcy and secure additional loans from the US government.

If these elements of restructuring all come together, it would represent a U-turn for a company that, just a week ago, appeared close to a liquidation-style bankruptcy.

The outlook for Chrysler, while still uncertain, has brightened considerably with two days to go before a government-imposed deadline for restructuring.

It could be yet another revival for a company that has been on the brink of failure numerous times, even as it has carved out a reputation for innovative designs.

“It’s a big plus for Chrysler not to have to go through bankruptcy,” says Peter Morici, a University of Maryland economist who follows the industry.

He worries, however, that Chrysler’s latest restructuring effort won’t be enough to make the company truly viable.

The risk is that even if the firm avoids bankruptcy now, it will be knocking at the Obama administration’s door again before the auto industry’s slump is over. In recent months, Chrysler has been subsisting largely on $4 billion in Treasury loans.

A deal with creditors
Still, the latest ray of hope for Chrysler is a significant one. In a deal with the Treasury, some of Chrysler’s biggest creditors agreed to swap $6.9 billion debt for $2 billion in cash. The agreement, not yet formally announced, has been reported by the Associated Press and other news organizations.

The Treasury still needs to get dozens of additional creditors, from banks to hedge funds, to sign on. Otherwise, it’s still possible the firm will face a bankruptcy proceeding where a judge can consider the creditors' claims, according to the AP.

Agreements with the union and with creditors could open the way for a deal with Fiat. The Italian carmaker is looking to broaden its reach in the US market. An Obama administration task force, trying to help the US car industry survive a deep downturn, told Chrysler a month ago that it needed a global partner to be viable and worthy of additional government aid.