Wednesday, July 25, 2007

Nobody Wants to Buy Chrysler's Debt

Chrysler Group, which has been acquired by Cerberus Capital Management, is trying to tap debt markets for $20 billion to fund the new company's automotive operations and its finance unit after the transaction between Cerberus and DaimlerChrysler closes on August 3. The company's bankers have been trying to convince investors to purchase $12 billion in loans for the auto business and $8 billion for Chrysler Financial.

So far, the $8 billion loan sale for Chrysler Financial appears to be on track to be sold by the end of this week, but today, the bankers decided to postpone the sale of the $12 billion loan sale for the auto business due to a lack of buyer interest. Instead, they will fund the bulk of that debt - $10 billion - from their own pockets. If these banks (J.P. Morgan, Citigroup, Goldman Sachs, Bear Stearns and Morgan Stanley) don't eventually find buyers for the loans, and if Chrysler has trouble repaying them, these banks would bear the first losses (investors who bought the rest of the loans would be given priority over Chrysler's assets if the company was in default).

Chrysler isn't the only auto company experiencing this problem. GM's sale of its Allison Transmission unit ran into similar financing problems this week. Wall Street firms put off a $3.1 billion sale of loans that would have funded the buyout of Allison by private-equity firms. Like the Chrysler-Cerberus transaction, the Allison sale is likely to still proceed.

The root of the problem is that debt investors have gotten nervous lately about the huge amounts of debt being underwritten to fund buyouts. On top of that, bonds tied to the subprime mortgage debt market have suffered in the past several months, making debt financing - a favorite tool for both the auto industry and for private equity - more difficult to use.

In the Chrysler and Allison situations, the lack of an interested market for the debt offerings probably won't be a deal-killer, but this development in the debt market may not be welcome news for companies that are in a compromised state and need access to as much capital as they can get to fund their restructurings.

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