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Chrysler Seeks $3.5 Billion in Largest High-Yield Bond Offering Since 2009

May 18, 2011
3 min to read


Chrysler Group LLC is turning to the bond market for the biggest high-yield offering in two years after lenders pushed back against the automaker’s proposed loan.


The company cut a $3.5 billion term loan by $1 billion and increased the bond offering by that amount to $3.5 billion, according to people with knowledge of the discussions. Auburn Hills, Michigan-based Chrysler, run by Fiat SpA, also had to raise interest rates on the six-year loan, the people said.

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"The loan deal simply wasn't going very well," said Marc Gross, a money manager in New York at RS Investments who helps oversee $3 billion in fixed-income funds. The changes "should stabilize the deal."


Chrysler was marketing as much as $7.5 billion of debt to repay borrowings from the U.S. and Canadian governments, which provided financing in 2009 to prevent the company's collapse. While the automaker will have to pay higher interest rates on the notes than the proposed loans, shifting the balance toward bonds allows it to take advantage of record low speculative- grade yields and obtain longer maturities.


Eileen Wunderlich, a Chrysler spokeswoman, declined to comment.


The bond offering is split between eight- and 10-year notes that may price as soon as May 19, said the people, who declined to be identified because terms aren't set. The eight-year securities may yield 7.75 percent to 8 percent and the 10-year notes may offer an additional 25 basis point premium above that, the people said.


The average B rated bond yields 7.36 percent, Bank of America Merrill Lynch index data show. The average absolute yield on junk bonds fell to a record low of 7.19 percent yesterday from 7.85 percent at year end.

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The offering "is going very well on the bond side," Gross said. "It's above market yield. If you're buying the turnaround story and you don't think the collateral pool's great, you'd rather just be in the bonds, which has better carry and upside."


Speculative-grade, or junk, bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's. Moody's assigns a B2 rating to Chrysler and S&P grades it a step higher at B+, according to notes from the credit- rating companies.


The company increased the rate it will pay for its $2.5 billion term loan to 4.75 percentage points more than the London interbank offered rate from initial guidance of between 4 percentage points to 4.25 percentage points, the people said.


The term loan will have a floor on the benchmark of 1.25 percent to 1.5 percent and be sold at a discount of 99 cents on the dollar. Three-month Libor, the rate banks charge to lend to each other, was set today at 0.26 percent.


Chrysler was also seeking a $1.5 billion revolving line of credit, the people said.

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Morgan Stanley is arranging the term loan, Bank of America Corp. is managing the bond offering and Citigroup Inc. is leading the credit line. Goldman Sachs Group Inc. is also helping arrange the deal, the people said.


The $3.5 billion junk-bond offering will be the biggest sale since Teck Resources Ltd., the Vancouver-based metals producer, sold $4.23 billion of bonds in May 2009, according to data compiled by Bloomberg.

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