Chrysler LLC, the smallest of the 'big three' US automakers, faces a Thursday deadline tomorrow to form an alliance with Fiat SpA in order to qualify for further US aid, though it is still uncertain whether it can avoid a bankruptcy filing.

However, a Reuters yesterday quoted two unnamed officials as saying that the US treasury has reached an in-principle agreement with Chrysler's first-lien lenders that may help the troubled automaker avoid bankruptcy.

The terms of the high-stakes debt restructuring deal were not immediately available, and representatives of Chrysler, the lenders and the treasury were unavailable for comment. Fiat, the Turin, Italy-based automaker, will form an alliance with Chrysler even if the company goes into bankruptcy, according to a Bloomberg report.

In the past week, Chrysler has nearly accomplished a set of goals set by the treasury, including cost-saving labour agreements with its unions and a tentative agreement to extinguish the vast majority of its bank debt.

The latter has a sticking point that may lead to a bankruptcy filing. Some of Chrysler's 46 lenders may balk at exchanging their $6.9 billion in debt for $2 billion in cash. If even one of them does this, it may force the Michigan-based automaker to seek court protection, according to reports. Official comments are hard to come by because the negotiations are private.

Chrysler's lenders, including JPMorgan Chase, Goldman Sachs Group, Morgan Stanley and Citigroup, have agreed to write down the debt to $2 billion, the Washington Post reported on Tuesday.

It is widely understood that the option preferred by Chrysler, Fiat and the US government is to avoid bankruptcy. The treasury lent Chrysler $4 billion and said it would lend as much as $6 billion more if Chrysler forms an alliance with Fiat.

If that can't be accomplished, Chrysler would be put into bankruptcy and quickly purchased by a new company formed by the government that would have an ownership structure similar to that envisioned without a bankruptcy filing, said one report.

In the Fiat-Chrysler deal, the Italian automaker would take an initial stake of 20 per cent in Chrysler in exchange for giving the US company access to its small-car technology, the company said in a presentation last week. It could get an additional 15 per cent by achieving government-set milestones. Fiat has an option to then purchase a majority interest in the company after all government loans are repaid.

A trust to cover retiree health care for the United Auto Workers union, which reached a cost-saving settlement with Chrysler last Sunday, would own 55 per cent of Chrysler.

Chrysler was part of DaimlerChrysler AG from 1998 to 2007, when Cerberus Capital Management LP bought an 80 per cent stake. Cerberus took the remaining 20 per cent from Daimler AG on 27 April, the German automaker announced.

GM on a similar road
As Chrysler nears a conclusion to its restructuring efforts, Detroit-based General Motors Corp is running down a similar road that reach its end will on 1 June. It has offered its bondholders 10 per cent of GM's ownership in exchange for giving up $27.5 billion in unsecured debt.

The largest US automaker said in a regulatory filing that it is considering a bankruptcy process that would be very similar to the one contemplated for Chrysler should GM's out-of-court restructuring fail: the government would form a new company and buy GM's best assets from the bankrupt entity.