Detroit Free Press -After three weeks of negotiations with banks and bond investors, Chrysler said Thursday it has raised the money necessary to repay all of the $7.5 billion in debt it owes to the U.S. and Canadian governments less than two years after it emerged from Chapter 11 bankruptcy.
The Auburn Hills automaker said it sold $3.2 billion in bonds and obtained a $3.2-billion loan as well as a $1.3-billion credit facility from investors and commercial lenders.
Chrysler intends to use the proceeds of the bonds and the loan along with a $1.27-billion investment from Fiat to repay its government loans four years earlier than required under an agreement reached as it emerged from bankruptcy on June 10, 2009.
The refinancing is a testament to the rapid progress Chrysler has made under the management of Sergio Marchionne, CEO of Chrysler and Italian automaker Fiat, said Kim Korth, president of Grand Rapids consulting firm IRN.
Under Marchionne, Chrysler has upgraded or redesigned 16 cars and trucks in two years and reported a quarterly profit of $116 million for the January-March period.
"I think he is as much of a transformational leader for Chrysler as (Alan) Mulally has been for Ford," Korth said.
By replacing its government loans with a commercial loan and bonds, Chrysler aims to shed some of the stigma of being rescued by taxpayers and reduce its annual interest payments.
The interest rate on Chrysler's new commercial loans is 6% while the interest rate on its bonds is just more than 8%, compared with an effective interest rate on Chrysler's government loans of about 11%.
Last year, Chrysler's $1.2 billion in interest payments cut into the company's operating margins and contributed to quarterly losses.
"The company needed to address its balance sheet and it needed to repay the U.S. and Canadian governments -- that is the primary goal of this loan and bond offering," said Kip Penniman, a credit analyst with KDP Investment Advisors.
Despite a flurry of last-minute negotiations, analysts viewed the final package as a big win for the automaker.
"They kill two birds with one stone by paying back the government and having lower-cost debt," said Van Conway, a turnaround expert with Conway MacKenzie in Birmingham.
Chrysler said Thursday it expects all of the transactions to close on Tuesday, as previously reported by the Free Press.
Repayment of the loans and Fiat's investment allow Fiat to increase its ownership of Chrysler from 30% to 46%, according to the company's 2009 agreement with the U.S. Treasury.
Even with the repayment of the loans, the U.S. government will still own 6.6% of Chrysler, down from 8.6%, after the transactions close. That's because the government became a lender and a shareholder as part of the 2009 restructuring.
Canada's stake, meanwhile, will drop to 1.7% from 2.2% and the UAW's Retiree Medical Trust will own 45.7%.
Wilmer Stith, portfolio manager, MTB Intermediate-Term Bond Fund in Baltimore, said Chrysler sought to refinance its debt when investors were eager for deals.
Stith also said the refinancing should benefit Chrysler and Fiat as the companies work to leverage each other's product strengths and catch up with larger and stronger competitors, Stith said.
"This deal will further propel the Fiat ownership of Chrysler," Stith said."All of this hopefully will result in a quick consolidation execution on the part of Chrysler globally."
