Government preparing for possible Chrysler bankruptcy

As the April 30 deadline for Chrysler to restructure its business looms closer, the Treasury department has begun to prepare a bankruptcy filing for the struggling carmaker. The news highlights the severity of Chrysler's situation should it fail to enact a deal with Italian auto giant Fiat, but the preparations are not exactly an indication that things are doomed and are described by the Treasury as a matter of due diligence.

Chrysler will also have to get its debt turned into equity and negotiate agreements with the United Auto Workers union group for it to avoid going into insolvency after April 30. A congressional delegation consisting of senators and White House staff released a statement claiming that at this point the "administration and the companies must continue to prepare contingency plans to avoid liquidation or a protracted restructuring process should the ongoing negotiations for out-of-court resolution fail".

While negotiations about the deal with Fiat slowly march on, insiders close to the company claim revealed to Bloomberg that the negotiations with both the Canadian Auto Workers union and the United Auto Workers were substantially completed. In fact, the largest hurdle now facing Chrysler, according to insiders, is reducing its debt with its bondholders and major stakeholders.

The last we heard from Chrysler's creditors was a willingness to exchange around $2.5 billion in debt for a 40% equity stake in Chrysler. Prior to this offer, the Treasury department had requested Chrysler's creditors to cut debt by around $6 billion, which was rejected by Chrysler's first-line creditors.

Chrysler's counteroffer has not yet been seen, but without co-operation from debtholders it seems inevitable that the Detroit carmaker will sink - unless of course, Fiat agrees to significant cash injections following an alliance.