Chrysler Group LLC, 30% owned by Italy’s Fiat SpA (FIATY), is expected to restructure its proposed refinancing package this week and repay $7.5 billion in loans to the U.S. and Canada governments, arising from its bailout in 2009, by the end of June. The Detroit-based automaker decided to raise $6 billion in new debt – $3.5 billion in term loans and $2.5 billion in second-lien bonds.
However, the investors showed reluctance regarding the loan portion of the transaction depending on the company’s business prospects. Moreover, the bank loan portion is likely to carry a higher interest rate than the currently proposed 5.5%–5.75%.
As a result, the company decided to raise the bond portion of the financing package at the cost of the loan portion as the former gained a strong response from potential investors.
Recently, Fiat announced that it can raise its ownership stake in Chrysler to more than 70% after repayment of government loans and exercising options. The Italian automaker currently holds 30% stake in Chrysler.
As part of Chrysler’s bailout deal in 2009, the U.S. Treasury bestowed management control of the company to Fiat as well as a 20% ownership. After repayment of loans, Fiat’s ownership in Chrysler will climb up to 46%.
The U.S. Treasury currently holds 8.6% of Chrysler, while Voluntary Employee Beneficiary Association (VEBA) – the healthcare trust affiliated with the United Auto Workers (UAW) union – has a 59.2% stake.
Soon after acquiring the majority ownership, Fiat expects to appoint the majority of Chrysler’s board of directors and can direct the timing of events, including a possible initial public offering (IPO).
In the first quarter of 2011, Chrysler posted a profit of $116 million for the first time since 2006. It compared with a net loss of $197 million in the year-ago quarter. Operating profit, excluding taxes, interest and pension-related costs, more than tripled to $477 million from $143 million a year earlier. The higher profit was attributable to higher sales and better pricing and mix.
Chrysler anticipates to earn between $200 million and $500 million in 2011, which would help the company hold an IPO later this year or early next year. It also expects to save $100 million in the second half of 2011 due to its debt refinancing and incur charges of about $500 million associated with paying off the loans early.
Chrysler and its hometown rival General Motors Co. (GM) took a federal bailout in 2009 after the global economic crisis when auto sales collapsed and consumer credit dried up.
GM earned a profit of $1.7 billion or 95 cents per share in the first quarter of 2011, topping the Zacks Consensus Estimate by a penny. It was also the company’s biggest profit in 11 years since earning $1.8 billion in the second quarter of 2000. Strong demand for its fuel-efficient lineups including Chevrolet Cruze compact and Equinox crossover helped boost the company’s sales.
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