Chrysler is expected to confirm today it has lined up new financing that will allow it to repay next week the nearly $7 billion in government loans it received as part of its 2009 bankruptcy.
Chrysler CEO Sergio Marchionne has said he had hoped to repay the $5.9 billion owed to the U.S. Treasury and another $1.6 billion provided by Canada before the second anniversary of the maker’s emergence from bankruptcy protection, in June 2009.
The move will allow Chrysler’s Italian partner, Fiat SpA, to quickly increase its stake in the U.S. maker to 46%, and that is expected to jump to 51% before year’s end. In fact, Fiat has given recent indications it would like to push its share in the long-troubled Chrysler to as high as 70% and may even skip the planned IPO that would have resumed public trading in Chrysler stock.
While Chrysler has long indicated its desire to pay off the loans – Marchionne frequently complaining about the high interest the government has been charging – the challenge has been to line up alternative sources of cash.
The maker has been working with Goldman Sachs, Morgan Stanley, Citigroup Inc. and Bank of America Corp. and initially hoped to get $3.5 billion in loans, a $1.5 billion revolving line of credit and then sell another $2.5 billion in bonds. This week it responded to concerns among the financial community by reducing the loan amount to $2.5 billion and making up the difference with a larger bond offering.
Investors are expected to begin bidding today. The revised financial package will carry lower financing costs than the government loans – but will still be higher than Chrysler had initially anticipated, reflecting continuing concerns about the maker’s long-term viability.
Under terms of the bailout Chrysler had until 2017 to pay back the U.S. and Canadian loans. But the maker not only wants to reduce interest rates running as high as 20% but also wants to press its ability to resume operations as a viable entity. Both Chrysler and General Motors – which emerged from Chapter 11 a month after the smaller maker – have been tarred with the sobriquet “Government Motors,” something that industry analysts say still impacts sales.
The decision to repay the loans follows the announcement of a $116 million first-quarter loan, Chrysler’s first since emerging from bankruptcy.
Once repayment is complete, Fiat is expected to pay $1.27 billion for an additional 16% equity in Chrysler. And with Chrysler expected to meet a third and final hurdle established by the bailout terms – bringing a 40 mpg product to market — it will get another 5%, possibly by year’s end.
But in an SEC filing, earlier this month, Fiat revealed it could eventually seek to boost its overall holdings in Chrysler to 70%. Though Marchionne has indicated a desire to stage an initial public offering later this year or in 2012, analysts believe that he may skip that process entirely if Fiat gains that level of control over the U.S. maker.
GM, meanwhile, has already paid back its bailout loans and roughly halved the stake held by the government with a November 2010 IPO. It remains unclear when the White House will move to sell off the remaining shares but that is not expected to happen in the near-term considering the recent downward trend in automotive stock prices.