Chrysler LLC's first-lien lenders have submitted a counter-offer to the U.S. Treasury that would swap some $7 billion in debt for equity in a restructured automaker allied with Fiat SpA , according to a person with knowledge of the closed-door talks.

The development comes just nine days before a deadline for the No. 3 U.S. automaker to complete concessionary deals with the United Auto Workers union and creditors and to clinch a tie-up with Fiat in order to win further U.S. government aid.

Talks on Chrysler's debt restructuring have moved slowly since the start of the month.

The automaker's lenders were not provided financial and operational details of Chrysler's business plan with Fiat until about the middle of April, people familiar with the exchange of proposals have said.

The Obama administration's autos task force had proposed that creditors write off $6 billion of what they are owed, a proposal that would have left the group of institutional creditors holding about $1 billion in Chrysler debt.

In the counter-offer submitted on Monday, Chrysler's lenders proposed instead that they take an equity stake in a restructured automaker, according the person with direct knowledge of the talks, who spoke about the confidential discussions on condition of anonymity.

Such a proposal would allow the roughly 45 banks and funds that hold Chrysler debt to benefit from investment gains if it succeeds in a restructuring that could see operational control shift to Fiat Chief Executive Sergio Marchionne.

Chrysler has been kept afloat with $4 billion in federal loans since the start of the year and could get another $500 million before its month-end restructuring deadline established by the autos task force.

The task force, which is headed by former investment banker Steve Rattner, has said it is willing to invest another $6 billion in Chrysler if the struggling automaker can complete the Fiat alliance and agreements to cut debt and costs with its creditors and major unions.

ALL-STOCK OFFER IN FOCUS

Chrysler has about $7 billion in first-lien loans that stem from its breakaway from Daimler AG in 2007. Daimler still holds a stake of nearly 20 percent in Chrysler although it has written down that investment to zero.

By offering to take all equity rather than cash or new debt, Chrysler's creditors would lighten a debt load that U.S. officials have called unsustainable.

An all-equity deal would also be broadly consistent with the debt restructuring terms that U.S. officials have urged at General Motors Corp .

GM has until June 1 to complete a revised business plan and cut deals with its bondholders and the UAW to slash debt under the terms of its government-directed restructuring.

Chrysler, which is now 80-percent owned by Cerberus Capital Management , lost $8 billion in 2008 and has warned that it could be forced to liquidate in bankruptcy if it does not secure new government funding.

A liquidation would split off stronger assets like Jeep and Chrysler's minivans while shutting factories and dealerships and eliminating thousands of jobs, analysts have said.

But Chrysler's first-lien creditors could still be paid out at a higher rate than the 15 cents on the dollar they were first offered by U.S. officials earlier this month.

Ratings agency S&P said in a recent report that Chrysler's lenders could expect an average recovery of 30 cents to 50 cents on the dollar in the event of default.

Chrysler lenders are hoping to complete a restructuring deal over the next week or so that would keep the automaker from bankruptcy, the person with knowledge of the talks said.

Other aspects of Chrysler's debt restructuring talks include the United Auto Workers. The automaker has asked the union to take stock in payment for over $10 billion it owes to a retiree health care trust fund.

Cerberus has offered to write off its own $500 million in loans to Chrysler.

The steering committee of Chrysler lenders includes JPMorgan Chase & Co , Goldman Sachs Group , Morgan Stanley , Citigroup , Oppenheimer Funds, Stairway Capital Management, Elliott Management and Perella Weinberg Partners.

(Reporting by Kevin Krolicki; Editing by Tim Dobbyn)

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