Chrysler Group LLC, partly owned by Italy’s Fiat SpA (FIATY), announced that it would raise $7.5 billion from bank loans and bond sales for paying off its U.S. government ($5.9 billion) and Canada government debts ($1.6 billion).
The Detroit-based automaker would issue $3.2 billion worth of bonds to investors in two tranches: $1.5 billion in eight-year notes with an 8% interest rate and $1.7 billion in 10-year notes with an 8.25% interest rate. It would also secure $4.3 billion in new bank loans that include $3 billion term loan and a $1.3 billion revolving credit facility.
These apart, the automaker would use $1.3 billion worth of investment from Italian automaker Fiat SpA to repay its loans. Fiat had raised its stake in Chrysler from 30% to 46% last month through this investment.
Fiat also aims to increase its ownership in the Detroit automaker to 51% by the end of the year. 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).
Initially, Chrysler wanted to take more loans and issue fewer bonds to take advantage of the lower interest rate. However, the investors showed reluctance regarding the loan portion of the transaction based on the company’s business prospects.
Under the 2009 bailout, Chrysler took $10.5 billion from the U.S. government and the rest from Canada and Ontario governments. The U.S. Treasury currently owns 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.
Repaying the government loans was painful for Chrysler as it carried higher interest rates (12% on the average) compared to the open market. The government loans cost the company $1.2 billion or more than $3 million per day in interest in 2010. The new bank loans would allow Chrysler to borrow money at 4.75% over the London interbank offered rate, subject to a Libor floor of 1.25%, reflecting interest rates of roughly 6%.
Even after the repayments, Chrysler would still owe about $2 billion to the U.S. government. The government expects to recoup the remaining loan amount by selling its 8.6% stake in Chrysler. Fiat also has an option to buy back the stake or it could be sold in the IPO in late 2011 or in 2012.
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 earning between $200 million and $500 million in 2011, which would help it to make 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 line-ups including Chevrolet Cruze compact and Equinox crossover helped boost its sales.
Be the first to comment