Chrysler to Repay Bailout Loans With More Loans
By Bill Visnic April 28, 2011
The U.S. government is going to be out of the auto business - at least the auto business run from Auburn Hills, Mich., - as the Chrysler Group LLC announces a plan that will repay the $7.5 billion in loans made to Chrysler by the U.S. Treasury Dept. and the Canadian government. The deal amounts to a wholesale refinancing of the loans to lower-interest debt securities and term loans packaged and sold to investors in the private sector. In effect, Chrysler is exchanging the government-held loans, which currently are backed by equity in the company, with unsecuritized private-sector loans and debt issues.
Along with this action, which Chrysler says will occur sometime in this quarter, controlling partner Fiat Automotive said it intends to purchase another 16 percent of Chrysler, an investment allowed under the company’s current operating agreement with its stakeholders in the event the government loans are repaid. The $1.27 billion Fiat will pay for the new stake in Chrysler – which raises Fiat’s overall ownership to 46 percent – also will be used to repay the U.S. and Canadian loans, the company said.
Equally important, this latest strategy seemingly will strengthen Chrysler’s case for an initial public offering of stock and a return to public ownership sometime this year or next – as well as sets the stage for Fiat to acquire a controlling interest in Chrysler. Meanwhile, the private investors Chrysler hopes to woo with the new offering will be betting the company’s return to publicly-owned status will be concurrent with a general auto-industry resurgence that bolsters Chrysler’s ability to repay to new loans.
Out from Under the ‘Shyster Loans’
Fiat and Chrysler CEO Sergio Marchionne (top, left) has talked for months about his desire to repay the U.S. Treasury and Canadian-government loans, which in a February moment of particular industrial-emperor pique he referred to as “shyster” loans. Marchionne quickly apologized for using the term and for his seeming ingratitude for the loans that kept the company from insolvency and allowed it execute a quick Chapter 11 bankruptcy and restructuring.
Chrysler’s current move to refinance $7.5 billion in outstanding government loans paves the way not only for Fiat to obtain controlling interest in the company but also represents what is sure to be a welcome escape hatch for the Obama administration, which has consistently borne criticism for the action to keep Chrysler afloat as well as its steering of the company’s bankruptcy proceedings.
Implications for GM
There is yet another advantageous angle: Chrysler’s move to repay the loans means U.S. taxpayers will receive full payback on the bailout – a matter that remains under question for the government’s similar investment in General Motors Co., which was similarly bailed out by loans from the U.S. Treasury Department and executed its return to public ownership last November. The Treasury Department loaned the company a total of about $50 billion and at the time of the IPO initially sold about 28 percent of the 61 percent of GM it owned.
It is believed the Obama administration is anxious for the Treasury Department to sell its remaining 33 percent of GM long before the President’s 2012 re-election campaign begins in earnest. But GM shares have languished at or below the $33 opening price since the IPO and it has been calculated the company’s share price would have to reach $53 in order for the government to fully recover its investment. The $53-per-share breakeven point is 65 percent more than the $32 price of GM stock at the time of this writing.
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