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Chrysler to Fully Repay $7.53 Billion in U.S., Canada Loans This Quarter

April 28, 2011
4 min to read


Chrysler Group LLC Chief Executive Officer Sergio Marchionne said repaying U.S. and Canadian government debts will elevate the image of the automaker’s brands after its bankruptcy two years ago, reported Bloomberg.


The automaker said today that it plans to repay $7.53 billion in loans from U.S. and Canadian governments this quarter as it moves toward an initial public offering and a merger with its Italian partner Fiat SpA. While the government-funded bailout hurt the company’s public perception, the damage wasn’t “lethal,” he told reporters today in Detroit.

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“There’s not a single doubt in my mind that once we manage to repay the U.S. and Canadian governments that the perception of our brands is going to improve,” Marchionne said. “It will be a great accomplishment if we can get it all done within two years since we came out of bankruptcy.”


Proceeds from a private offering of a term loan and debt securities to institutional investors will be used to repay the money to the governments this quarter, Chrysler said in a statement. The company will offer a $3.5 billion term loan, $2.5 billion in bonds and seek a $1.5 billion revolving credit line, said two people familiar with the plan.


Marchionne has said interest as high as 14 percent on the U.S. borrowings and 20 percent on the Canadian debt kept the automaker from reporting a net profit. The loans must be repaid before Fiat, which Marchionne also runs, can increase its stake to 51 percent.



“Chrysler will have meaningful savings when compared with the cost of the government loans,” said Eric Hauser, a Credit Suisse Group AG analyst in London, who estimated the carmaker may reduce interest expenses by about $270 million.


Morgan Stanley, Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc., the four leading the financing, are holding a conference call today with seven secondary banks to brief them on the proposal, said one person familiar with the plan, who asked not to be identified discussing private matters.

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Morgan Stanley is arranging the term loan and Bank of America is managing the bond offering, said the people familiar with the plan. A bank meeting on the term loan may come as soon as next week, they said.


Marchionne, who also runs Turin, Italy-based Fiat, is slated to release Chrysler’s first-quarter results on May 2. He is pushing Chrysler to earn as much as $500 million in net income this year, its first annual profit since emerging from bankruptcy reorganization in 2009.


Chrysler’s announcement came before a visit to Detroit by U.S. Treasury Secretary Timothy Geithner. He toured Chrysler’s Jeep factory there and is scheduled to speak to the Detroit Economic Club. Geithner didn’t speak to reporters at the assembly plant.


The new debt securities will be exempt from registration under the U.S. Securities Act of 1933, Chrysler said in the statement.


The face values of the debts to the U.S. and Canadian governments are $7.53 billion, according to Chrysler’s Feb. 25 Securities and Exchange Commission filing. The refinancing includes $1.27 billion Fiat will pay to purchase 16 percent of Chrysler, raising the Italian automaker’s stake to 46 percent.

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The final 5 percent needed to gain control will come later this year after meeting a government requirement for making a fuel-efficient vehicle, Chrysler has said.


The automaker may hold an initial public offering this year or next year, Marchionne has said.


The refinancing should lower interest costs and make Chrysler’s eventual stock offering more attractive, said Dennis Virag, president of Automotive Consulting Group in Ann Arbor.


“When you look at the cost of capital today, the cost of borrowing, it’s extremely low,” he said in a telephone interview. “Anyone that can get out of higher cost debt for lower cost debt is a no brainer.”


Fiat Chairman John Elkann said today “all options are open” on the timing of a merger of the two carmakers. Exor SpA, Fiat’s largest shareholder, may dilute its stake in the company once the combination takes place, said Elkann, who also runs Exor as the representative of the controlling Agnelli family.

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Fiat rose 15 cents or 2.1 percent to 7.22 euros as of the close of trading in Milan today. The shares have gained 7.8 percent this year, valuing the Italian carmaker at 8.94 billion euros ($13.3 billion).


Fiat gained a Chrysler holding as part of the U.S. automaker’s government-backed restructuring. In exchange for sharing management and technology, as well as reaching operational milestones, Fiat receives as much as 35 percent of Chrysler without paying any cash. It currently has 30 percent.


Chrysler’s capital infusion may give the U.S. Department of Energy “additional comfort” about the automaker’s financial structure, Marchionne told analysts last week. After the Fiat stake increase is completed, Chrysler will likely be able to obtain as much as $3.5 billion in low-interest loans, he said.

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