Chrysler lenders and Treasury set deal framework: sources

By Poornima Gupta and Caren Bohan

DETROIT/WASHINGTON (Reuters) - The U.S. Treasury has reached a tentative deal with banks representing most of Chrysler LLC's first-lien debt but the agreement needs approval from more than 40 other lenders holding the automaker's debt, people familiar with the talks said on Tuesday.

Should this deal be approved, it would mark a major step toward cementing an alliance with Italy's Fiat SpA and could keep the U.S. automaker out of bankruptcy.

However, there could be no guarantee the debt restructuring would win support from Chrysler's lenders and a bankruptcy filing would still be possible, people involved in the discussion said.

The deal, reached late on Monday, would wipe out $6.9 billion of Chrysler's debt in exchange for $2 billion in cash, the people said.

Chrysler's lenders are currently doing due diligence on the terms of the deal and it has yet to be approved by all of the debt holders, one of the people said.

"This is a very significant concession that these banks made," a second source said, adding that the deal would not provide lenders with equity in the company.

But there is still a possibility of a "quick surgical bankruptcy" should there be a need to "drag along any recalcitrant banks," the source warned.

Further details on the high-stakes debt restructuring deal were not immediately available, and representatives of the lenders and the Treasury could not immediately be reached for comment. Chrysler declined to comment.