Chrysler Close To Repaying Government Loans
DETROIT (WWJ/AP) – Chrysler is expected to pay off its government loans as early as next week, using money it's raised through private sources. This doesn't get the company out of debt, but it does save it more than a billion dollars each year in interest payments.
The Associated Press quotes "three people briefed on the matter" as saying Chrysler has now lined up investors to help it refinance $7.5 billion in loans from the U.S. and Canadian governments. Under the deal, the company would take out $2.5 billion in bank loans and sell $3.5 billion worth of bonds to investors. Italy's Fiat, which has management control of Chrysler, would kick in $1.3 billion more to raise its stake in the U.S. carmaker.
The Detroit Free Press reports that the loan deals will close on Tuesday, and as soon as that happens, Chrysler will pay off the government debt. Time is important, as Chrysler is paying approximately three million dollars each day in interest.
Chrysler's refinancing cuts the interest rate that the company pays on the money to about 8 percent on the bonds and 6 percent on the bank loans from around 12 percent the governments charged per year. Last year Chrysler paid $1.2 billion in interest on the loans.
The ability to get loan money from private sources is seen as a sign of health for Chrysler. Back in 2009, those private lenders saw Chrysler as too much of a risk. That led to the government rescue and Chrysler's trip through bankruptcy.
While the loans were the bulk of the governments assistance to Chrysler, the Treasury department still has an 8.6 per cent ownership stake in the company. That's expected to be sold off when Chrysler holds an Initial Public Offering of stock late this year or early next year.
Canada got a 2.2 percent stake in Chrysler and could get more cash in the public stock sale.
Earlier this month Chrysler announced first-quarter net income of $116 million, its first profitable quarter since 2006. The profit resulted from the company's work during the past two years to climb out of bankruptcy protection. Chrysler has rolled out 16 new or revamped cars and trucks. Its sales are up nearly 23 percent this year because of new models, such as the Jeep Grand Cherokee SUV.
Chrysler had hoped the refinancing package would include $3.5 billion in bank loans and $2.5 billion in bonds. But when CEO Sergio Marchionne and other executives went on the road pitching the debt deal in recent weeks, the bonds were popular and interest in loaning money to Chrysler wasn't as strong. Chrysler wanted more loans because they carry a lower interest rate.
Banks were unwilling to take on the amount of money Chrysler was seeking at the rate it was offering, said Wilmer Stith, portfolio manager with MTB Investment Advisors in Baltimore.
But interest in buying Chrysler's bonds was high amid a hot U.S. bond market as investors scramble for higher yields.
New bonds at around 8 percent interest are hot items for investors in an era of low interest rates, Stith said.
"The corporate bond market is certainly open for business,'' he said. ``Lots of investors are looking for good, solid corporate bonds, both high-yield and investment-grade.''
Chrysler bonds are attractive because they now pay 1.5 to 2 percent more interest than bonds issued by GM and Ford, he said, adding that the GM and Ford bonds are in short supply.
The Associated Press and WWJ AutoBeat Reporter Jeff Gilbert contributed to this story.
