As Steve Rattner described in his book “Overhaul,” the Presidential Auto Task Force very nearly decided not to rescue Chrysler, with the decision coming down to a single vote. Now, it seems, that with Chrysler blaming the “shyster” interest rates on its government loans for its lack of profitability, Chrysler’s viability now depends on rounding up a “lender of second to last resort.” And, according to the latest reports, that rescue-of-a-rescue effort is still very much hanging in the balance as well. If CEO Sergio Marchionne thought the government’s loan terms were “shyster”-ish, he was clearly in need of some context from Wall Street… and he doesn’t seem to be liking it.
Though Chrysler needs about $7b in fresh debt to get out from under its oppressive government rescuers, the WSJ [sub] reports that Chrysler’s current debt proposal includes only $3.5b in loans and $2.5b in bonds. And, as the Journal describes, one of those elements is facing some trouble
While the bonds, which yield more than the loans, attracted strong interest from the beginning, the loan portion is off to a slow start. The loan will likely now be reduced, with a corresponding increase to the bond, according to people familiar with the matter. The loan will also likely carry a higher interest rate than previously proposed, they said. Overall, that shift will slightly increase the cost of the new debt.
Chrysler, which currently pays around 10 percent on its government loans is looking for loans at 5.5-5.75 percent. The fact that it’s having trouble getting loans at that rate means it’s more likely to have to take a disproportionate amount in bonds, which yield a not-insignificant 7.5%. The takeaway: nobody wants to lend Chrysler money at what it considers fair interest rates, and it will likely reduce its interest costs by less than half. Perhaps those government loans were more fair than Marchionne gave them credit for?
So what’s the problem? Well, the market, for starters.
The loan market’s limits have been stretched this month by the appearance of a number of large leveraged transactions, including multi-billion dollar deals by Delphi Automotive and Asurion Corp. The timing of Chrysler’s deal was complicated by the process of getting consensus from the U.S. government, the Canadian government and Fiat, said the people familiar with the matter.
The pool of money available for leveraged loans has shrunk because new collateralized loan obligations, known as CLOs, have disappeared. Also, many of the hedge funds that previously specialized in either loans or bonds are now buying both and are searching for attractive values across both markets.
Other problems? Well, Chrysler’s profitability has to be one of them. With $337m in interest expenses in Q1, a 33% reduction on a quarterly basis (a conservative best-case scenario for the re-fi), would still leave the firm with just under a billion dollars per year of interest costs. Given that Chrysler’s first profit in years was a razor-thin $116m, few of the lending banks are likely to delude themselves into thinking this re-fi will unshackle a slumbering giant that’s poised on the brink of huge profits. Add to this, the fact that the auto industry largely sees Chrysler’s rescue as negative for the health of the industry as a whole, and banks are going to be very hesitant about wading into a lot of Chrysler exposure.
Reuters adds some investor perspective to the picture, noting
Chrysler’s loan deal has struggled in part due to the troubled history of the company, as well as a pickup in supply of new leveraged loans that launched for syndication in recent days, potential investors said.
“In a market like this, trading sideways and with so much supply, people can afford to be choosy, especially when it comes down to a name where you have lost money before,” one of the investors said.
A second investor looking at the deal earlier this week said that pricing on the transaction may not adequately compensate lenders for the risk involved in the loan.
A third investor who was shown the deal said that given the large size of the loan, lenders didn’t feel pressed to rush in.
“Worst case, they can always pick it up in the secondary,” he said, adding that Chrysler’s car lineup consists mainly of larger cars that use more gasoline and that the company is relying on the Fiat brand, which is not widely known in the U.S. market.
Chrysler’s four underwriting banks, Citigroup, Morgan Stanley, Bank of America and Goldman Sachs, have each committed $200m to a $1.5b Chrysler revolving credit line, and though that facility is fully subscribed, the larger term loan is where the hesitation is taking place even though the revolver and the term loan are being priced identically, as follows:
400 to 425 basis points over Libor with a 1.25 percent Libor floor, along with a discount of 99 to 99.5 cents on the dollar.
Will Chrysler wrap up its financing and pay back the government? No matter what terms it finally gets, it will certainly save money with the re-fi, and will want to reap the PR benefits that come from misleading taxpayers into thinking the bailout payback is complete. Whether a Wall Street re-fi really changes much in the fundamentals of Chrysler’s business remains very much to be seen.