Chrysler, the once-bankrupt U.S. automaker that received billions in government aid last year, will soon get new federal loans to help retool factories to make more fuel efficient vehicles, according to sources familiar with the matter.

The timing of the Energy Department award to Chrysler is fluid, but sources with knowledge of the financing and the industry say the automaker will likely receive approval for new credit before General Motors Co.
GM is preparing a initial public offering for mid-November and cannot take on the government awards without complicating its IPO.

Chrysler, which is nearly 10 percent owned by the U.S. Treasury and was placed under management control of Italy’s Fiat SpA in its restructuring, has applied for roughly $10 billion in loans.

It is unclear how much of that request will be granted.

New loans would be welcomed by investors as a sign of government confidence in the U.S. auto industry and plans for capital investment in fuel efficient technologies.

For Chrysler, Energy Department financing would improve cash flow and help it accelerate payment of some $7 billion in pricey government loans extended as part of bankruptcy.

Terms are steep for Treasury financing as lender of last resort. According to its August financial update, Chrysler still owes the Treasury $5.7 billion. The interest rates on that debt range from 7.22 percent to 14.33 percent.

Debt servicing costs were a chief reason Chrysler reported a net loss in its second quarter.

Chrysler, planning for an IPO in late 2011, is revamping its lineup and introducing vehicles with Fiat-based technology. The automaker could be expected to use new government loans to overhaul assembly, engine and transmission plants.

Chrysler declined to discuss any time frame for approving its bid.

“Our application covers a wide variety of technologies including electric vehicles,  hybrids and advanced gasoline engine technology,” a Chrysler spokeswoman said.

The Energy Department could approve some or all of Chrysler’s requested financing, but several loans have been made to other companies and pending loan requests from carmakers and suppliers exceed an estimated $17 billion in available funds.

The $25 billion auto loan program was created by Congress in 2007 to help U.S. companies overhaul assembly facilities to make more fuel efficient cars, including electric vehicles.

President Barack Obama wants a 50 percent reduction in fuel consumption and carbon emissions in cars and trucks within 20 years to reduce U.S. oil imports and ease global warming.

The loans are separate from the Treasury corporate bailout program that financed GM and Chrysler bankruptcies in 2009 and has become a political drag for Obama’s Democrats ahead of next Tuesday’s elections.

GM has submitted four applications for Energy Department funds totaling $14 billion. This includes a bid from supplier Delphi, a former GM unit and now a private company.

The Energy Department last year awarded more than $8.5 billion in loans to handful of companies including Ford Motor Co., Japan’s Nissan Motor, Tesla Motors and Fisker Automotive. Some of the money is going to improve standard engine and transmission technology, while a large chunk of financing is dedicated to electric car development.

Nissan will roll out its electric Leaf this year.

The Energy Department said it would not discuss specific loan applications but has said previously it was in active discussions with GM and Chrysler.

“The secretary (Steven Chu) has made expediting the department’s loan process a priority and has instituted changes to ensure that loans are made as quickly as possible,” agency spokeswoman Stephanie Mueller said.