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Chrysler's Refinancing: No, It's Not (Really) Revenge of the Bondholders

Punish us, but also give us the money.
In a critical step toward Fiat taking a majority stake in Chrysler -- and Chrysler staging a future IPO -- the once-bankrupt Detroit carmaker has successfully paid off $7.6 billion in loans to the U.S. and Canadian governments. It did this be refinancing the debt, at some steep rates. Revenge of the bondholders who took a haircut on Chrysler debt in 2009? Sort of, but not really.

Chrysler was a tough test case
Chrysler's turbo-charged bankruptcy -- after the auto task force and the Obama administration decided the company was worth saving -- was a test-run for the later bankruptcy of General Motors (GM)

Both companies were driven into insolvency by unsustainable debt levels. And right up until the shotgun marriage with Fiat and the accelerated bankruptcy were executed, some of Chrysler's bondholders were refusing to play ball.

It fell to the car czar Steve Rattner, an investment banker, to put the wood to Chrysler's reluctant bondholders. He succeeded, although resistance was at times stiff.

There's consequently been some snickering speculation that the rates Chrysler got on its new bonds (which didn't make up the entire refinancing) were vengefully unfavorable. You could view this unemotionally and say that the rates, which ranged from 8 to 8.25 percent, were steep because, you know, Chrysler was bankrupt a year and half ago.

But you could also take the vindictive angle at face value and say... so what?

The big news here is that the Chrysler-Fiat alliance continues to march along toward Fiat assuming its majority stake in the smallest of the Big Three Detroit carmakers. It might be a "subprime" debt candidate, but at least it's a candidate. And debt now at bad rates at least implies that future issues will get better terms.

So if the bond markets are roughing up the resurgent Chrysler and its aspiring Italian owners, it's likely to be a brief tussle.

When will Fiat spend some real money?
It's worth remembering at this juncture that so far, Fiat CEO Sergio Marchionne has managed a systematic takeover of Chrysler without spending huge Fiat money. That will change as Fiat moves toward a majority stake, but right now the Italian automaker has acquired 46 percent using a combination of government and private financing, plus $1.3 billion of its own cash. This is Marchionne, from the Chrysler press release:

Less than two years ago, we made a commitment to repay the U.S. and Canadian taxpayers in full and today we made good on that promise....The loans gave us a rare second chance to demonstrate what the people of this Company can deliver and we owe a debt of gratitude to those whose intervention allowed Chrysler Group to re-establish itself as a strong and viable carmaker.
You could argue that Chrysler was a basket case in 2009 and that no one except Fiat wanted anything to do with it. However, Chrysler still owns a decent piece of U.S. market share and, more importantly, a solid global brand in Jeep and a competitive pickup truck brand in Ram.

The addition of Fiat's small, fuel-efficient auto lineup gives Chrysler something that Ford (F) has already developed, that General Motors is striving to create, and that the Japanese automakers perfected years ago. Chrysler may still be paying too much interest on its new debt (Curse you, bond market!). But it's a far better investment now than it's been in quite a while.


Photo: Chrysler Media
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