March 3 (Bloomberg) -- Chrysler LLC, needing lender concessions by March 31, isn’t negotiating with its banks because it can’t persuade them to discuss trading loans for uncertain equity, people familiar with the companies’ actions say.

Chrysler must reduce its debt by $5 billion by getting creditors such as JPMorgan Chase & Co. to trade debt for an ownership stake or by changing loan terms in order to be viable, the Auburn Hills, Michigan-based automaker said on Feb. 17 in a plan submitted to the U.S. Treasury.

Banks have little incentive to trade their loans, and the only other creditors Chrysler lists that could take more equity for debt are the U.S. government and the United Auto Workers union, which already has agreed in principle to reduce its obligation by 50 percent.

“It’s going to be a tough sell to get the banks to give up their position for worthless equity,” said Don Workman, a bankruptcy attorney at Baker & Hostetler LLP in Washington. “The best Chrysler can hope is that the government is going to force them to do it.”

The banks, which include Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and JPMorgan, would be first to be repaid in the case of a bankruptcy. By taking equity in exchange for debt, the banks would lose that standing. The caveat is that each of the banks has taken U.S. government aid from the Troubled Asset Relief Program and may be subject to Treasury’s influence, Workman said.

One Red Light

“Chrysler remains focused on achieving the steps outlined in its viability plan which includes formalizing and ratifying concessions from the union and receiving an additional $5 billion in debt relief from its stakeholders to meet the March 31 deadline,” said Stuart Schorr, Chrysler spokesman.

One slide in Chrysler’s presentation to Treasury showed progress on seven restructuring elements with traffic-signal symbols. Five were marked with green lights; union negotiations were yellow. Creditors were labeled with a red stoplight.

“The $5 billion debt reduction is a key component that allows us to go forward on the viability path,” Chrysler President James Press said in an interview in Geneva today. “From the standpoint of the financial institutions, the value of their debt would be possibly less than if we were to liquidate.”

Declining to comment were JPMorgan spokesman Brian Marchiony, Citigroup spokeswoman Danielle Romero-Apsilos, Goldman Sachs spokesman Michael Duvally, Morgan Stanley spokeswoman Mary Claire Delaney and Treasury spokesman Isaac Baker.

Chrysler executives met last week with the auto restructuring task force led by Treasury Secretary Timothy Geithner and Lawrence Summers, director the National Economic Council. Steven Rattner, a private-equity firm manager, is advising the panel as it gathers information while deciding whether to grant more aid to Chrysler and General Motors Corp.

Few Sources

Chrysler owes its banks a combined $6.9 billion. In its plan to the government Chrysler already has assumed that owners Cerberus Capital Management LP, which holds 80.1 percent of Chrysler, and Daimler AG will forgive $2 billion in loans and that the union will trade as much as $5.3 billion in obligations from its retiree health-care fund for equity in the company.

The automaker needs $5 billion in further debt reduction and the only sources Chrysler listed in its plan were the banks, the remaining union obligation of $5.3 billion, and the U.S. government.

Chrysler now has a $4 billion loan from the U.S. Treasury and is asking for $5 billion more and $6 billion from an Energy Department program designed to convert old plants to make more fuel-efficient vehicles.

That borrowing would push Chrysler’s debt to $27.8 billion. The automaker says it can carry no more than $22.8 billion to be viable.

Equity Value Unclear

The value of owning Chrysler, which lost $8 billion last year, is questionable, said Steven Kaplan, a business professor at the University of Chicago.

Owners take on liabilities and normally lose everything if the company goes into bankruptcy. Meanwhile, bank loans are secured against assets, such as plants, other buildings and brand names. These can be sold and the loan amounts recovered in the case of a restructuring or liquidation.

The situation is different with General Motors Corp., which is trying to reduce its debt by two-thirds by negotiating with bondholders to take stock in exchange for reducing debt. Those debt-holders aren’t secured and have no guarantee they would get repaid if the company entered bankruptcy.

Chrysler isn’t bound by the same requirement in the loan agreement to cut its debt because, unlike GM, it doesn’t have unsecured bondholders.

Lenders are sometimes willing to make such an exchange by concluding that the company’s assets are so degraded that equity is a better gamble, said Len Blum, managing partner of investment banking firm Westwood Capital LLC in New York.

Chrysler told the government that banks may get 11 percent to 43 percent of their loans repaid in an “orderly wind-down” of the business.

The University of Chicago’s Kaplan said the banks likely would prefer restructuring or liquidation to equity.

“If I am a secured lender, I can’t be worse off by staying the way I am,” he said. “I can only be worse off if I make the exchange, so I am not doing it. I’ll take my chances in bankruptcy.”

To contact the reporter on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net

Last Updated: March 3, 2009 14:49 EST