7 Min Read
DETROIT (Reuters) - Chrysler Group LLC, which came to the brink of collapse before a federal bailout in 2009, plans to fully repay more than $7 billion in loans from the U.S. and Canadian governments by the end of June.
The company's announcement on Thursday comes almost two years after Chrysler emerged from a U.S.-funded bankruptcy under the management of Italian automaker Fiat SpA.
Thursday's announcement came the same day U.S. Treasury Secretary Timothy Geithner visited Detroit and met with Sergio Marchionne, the chief executive of Fiat and Chrysler.
Proceeds from term loans and debt sold to institutional investors will be used to repay the governments, Chrysler said in a statement. Chrysler aims to repay the governments and pay related fees and expenses in the second quarter.
Fiat will also exercise an option to buy 16 percent of Chrysler for $1.27 billion during the quarter. Chrysler said it will use that cash to repay the loans.
The debt offering, term loans and the cash infusion from Fiat are all expected to occur concurrently, the company said.
Marchionne led Geithner on a tour of a Chrysler plant in Detroit, where he later spoke to reporters and did not say when all work on the refinancing will be completed.
"It ain't over until the fat lady sings. We have a lot of work between now and (when the refinancing) actually gets realized," he said.
Refinancing the loans will make a "material difference" to Chrysler's profit-and-loss statements, he said. "It has great value," Marchionne said.
Repaying the loans from the U.S. and Canadian governments would mark a critical step for Chrysler as the automaker tries to distance itself from the controversial rescue by the Obama administration and rebuild consumer confidence in the brand.
It will also allow Chrysler to forgo high interest rates on the loans and put itself on firmer financial footing ahead of an initial public offering this year or next.
Last year, Chrysler paid more than $1.2 billion in interest, or more than $3 million a day.
"It's a very smart move on the part of Marchionne," said Dennis Virag, president of the Automotive Consulting Group Inc. "What he's doing is converting high-cost debt to lower-cost debt and he's providing financing for future product development for ultimately taking the corporation public."
Marchionne said last November when General Motors Co issued its record IPO that it gave "a good fix" on what the market expects in pricing Chrysler's IPO.
On Thursday, he said the IPO markets are not changed due to the March 11 earthquake in Japan and the resulting supply chain disruptions that have hit all automakers.
"The markets are as open now as they were before," Marchionne said.
Chrysler and its U.S. automaker counterparts GM and Ford Motor Co have not been as affected as Japanese automakers.
GM's CEO Dan Akerson said on Thursday that GM has sustained no production disruptions due to the Japan crisis. Ford has said that while it has temporarily shut plants in Asia and South Africa, the earthquake in Japan will have no "material" impact on its earnings.
Marchionne is pushing Chrysler to earn net income of as much as $500 million this year. The company reports first-quarter earnings on May 2.
The debt securities will be sold in a private offering exempt from registration under the U.S. Securities Act of 1933, Chrysler said in a statement.
The face value of Chrysler's debt is about $7.5 billion.
The refinancing also represents an important milestone for the Obama administration, which faced scrutiny over its highly unpopular decision to save the smallest and weakest of Detroit's three automakers from collapse.
Marchionne, who divides his time between Italy and the United States, has been credited with reviving investor interest in Chrysler, an automaker that was left for dead just two years ago.
The company has unveiled 16 new and revamped vehicles, including the Grand Cherokee and the Chrysler 300. The company has also built some renewed buzz for its flagship brand with a Super Bowl ad and the tagline "Imported from Detroit."
Virag noted that Chrysler has also lowered its break-even point and has newer, more attractive products in the pipeline.
"They're headed in the right direction, all they need is time," Virag said. "This offers them time."
The U.S. automaker did not divulge any figures, but people familiar with the matter said Chrysler plans to raise $6 billion in term loans and bonds to repay the government debt.
Chrysler has also invited banks to start due diligence on the company and its credit on Thursday, ahead of the official launch of the refinancing package next week, the sources said.
Chrysler executives will begin to court potential debt investors, primarily in North America, as part of a road show next month.
Morgan Stanley will lead the term loan deal, Bank of America the bond deal and Citigroup the credit line, people familiar with the matter said. Goldman Sachs is adviser on Chrysler's overall refinancing efforts.
In the past two years, Chrysler and Fiat have been drawing closer operationally.
About half their supply chain is shared. Chrysler's parts and services division Mopar is selling Fiat-made parts. Marchionne has said the company may build a Maserati SUV on the same platform Chrysler uses to build the much-praised Jeep Grand Cherokee.
As part of the bailout deal, Fiat was given management control of Chrysler and an initial 20 percent stake. Fiat was given a series of tests and an option that would allow it to boost its stake in Chrysler to 51 percent.
But Fiat can only take majority control if Chrysler repays the government loans in full. Marchionne wants to get to 51 percent by the end of the year.
The refinancing deal paves the way for Fiat to take a majority stake in Chrysler, which analysts and bankers said would make the U.S. automaker more attractive to potential stock investors.
The chief executive of Exor SpA said Thursday the company would remain a leading shareholder of Fiat even after Fiat takes majority control of Chrysler.
Additional reporting by Bernie Woodall, editing by Gerald E. McCormick, Dave Zimmerman, Matthew Lewis and Bernard Orr