Chrysler lenders offer to swap $2.5B for equity

Banks and hedge funds holding $6.9 billion in Chrysler debt have offered to forgive $2.5 billion of it in exchange for about a 40% stake in a Chrysler-Fiat alliance, two people briefed on the plan said.

The lenders also want Fiat to invest $1 billion cash in Chrysler, and they want to appoint one person to the company’s board, according to term sheets.

Chrysler is racing to meet a government-imposed April 30 deadline to swap debt for equity, cut labor costs and negotiate an alliance with Italy’s Fiat Group. If it misses the deadline, government aid will end and Chrysler would probably face liquidation.

Last week, creditors rejected a Treasury Department proposal to reduce the debt to $1 billion, absolving Chrysler of about 85% of its secured loans.

The creditors’ offer, delivered Monday, according to one of the people, would swap about 35% of the debt for equity, short of government restructuring goals that called for Chrysler to retire at least two-thirds of its debt.

The Treasury Department and Chrysler declined to comment.

Moody’s Investors Service on Tuesday lowered its rating of Chrysler’s debt one notch from “Ca” to the lowest possible rating, “C,” indicating “the certainty that Chrysler . . . will file for bankruptcy” or restructure its debt in a way that would be considered a default for ratings purposes.