Chrysler to pay $7.5B government loans back

Lower interest to save firm $270M per year

4/29/2011

DETROIT -- Chrysler Group LLC said Thursday it intends to pay off its $7.5 billion in government loans with a new debt sale, an investment from Fiat SpA, and a new loan agreement with institutional investors.

The Auburn Hills, Mich., automaker said it plans to use the proceeds of the term loan and the debt offering, with the $1.27 billion that Fiat said it would invest in Chrysler last week to acquire an additional 16 percent in Chrysler, to pay off the government loans.

Chrysler owes $5.8 billion to the U.S. Treasury and $1.7 billion to the Canadian governments as part of a 2009 restructuring that allowed it to emerge from Chapter 11 bankruptcy.

Chrysler said it plans to complete the repayment by the end of June. Fiat currently owns 30 percent of Chrysler.

The company did not break down the amount of money it is seeking to borrow or say how much new debt it plans to issue through securities.

Chrysler Chief Executive Officer Sergio Marchionne has said he wants to refinance Chrysler's debt because the interest rate is higher than market rate. The effective interest on the U.S. borrowings is as high as 14 percent and as much as 20 percent on the Canadian debt.

Credit Suisse auto analyst Erich Hauser estimated Chrysler could save about $270 million annually after it completes the refinancing.

He also said Chrysler's timing is good, even though it hasn't reported a profitable quarter since it has emerged from bankruptcy.

"They are trying to use what I think is a beneficial market while it is still there," Mr. Hauser said. "They are clearly trying to get the deal done as soon as they can."

Barclays Capital analyst Brian Johnson said the interest rate on Chrysler's loans is one of the main reasons its first-quarter operating margin is estimated to be about 6.4 percent, compared with Ford's 10.1 percent.

After the refinancing, the U.S. government's stake in Chrysler is expected to shrink from 9.2 percent to 6.6 percent.

However, refinancing Chrysler's debt could hurt Fiat. On Tuesday, Moody's placed Fiat's credit rating under review for a possible downgrade. "The review was triggered by Fiat's announcement on April 21 that it had reached an agreement with Chrysler itself and the other members of Chrysler to purchase an additional 16 percent stake in Chrysler," Moody's said in its report.

More details about how Chrysler plans to structure the deal could be announced Monday, when the company reports first-quarter financial results.

Mr. Marchionne is in a race to raise Fiat's stake in Chrysler to 51 percent as soon as possible. That's the majority share number he wants to hit before an initial public offering of Chrysler later this year or early in 2012.

To get from 46 percent to 51 percent, under terms of Chrysler's 2009 operating agreement, Fiat must build a vehicle in the United States capable of achieving 40 mpg. By doing that, Chrysler would meet another threshold in its 2009 agreement with the U.S. Treasury and Canada.

Paying off the government loans also could clear the way for Chrysler to win a loan from the U.S. Department of Energy under a program designed to encourage automakers to invest in fuel-efficient technology. Chrysler has applied for a loan that exceeds $6 billion.