April 27, 2011
Chrysler Expected to Erase Its Debt to Government
By BILL VLASIC
DETROIT — Of the three Detroit carmakers, Chrysler was in the worst condition when the recession hit. And even with a taxpayer bailout, it has been slower to recover than its rivals.
But on Thursday, the company will announce a milestone in its comeback effort, declaring its intention to repay its $7.5 billion in high-interest loans — $5.8 billion to the United States government and $1.7 billion to Canada’s — as soon as next month by selling new bonds to investors.
Once it pays back the loans, Chrysler can strengthen its ties to Fiat, its Italian partner, and begin adding more fuel-efficient cars to its truck-heavy lineup.
Sergio Marchionne, the chief executive of both Chrysler and Fiat, is expected to announce the debt plan Thursday when he welcomes the Treasury secretary, Timothy F. Geithner, for a tour of the company’s Jeep plant on Detroit’s east side.
Although details of the debt offering, to be led by Goldman Sachs, are still being negotiated, Chrysler intends to use the proceeds of the sale to help it pay off all of the government loans, according to people familiar with Chrysler’s plans.
Both Chrysler and the Treasury Department declined to comment on the announcement.
The loans have been a psychological and financial drag on Chrysler’s efforts to revamp its operations and gain market share since emerging from its government-sponsored bankruptcy in 2009.
“They started in a very deep hole after the bankruptcy,” said Dennis Virag, president of the Automotive Consulting Group in Ann Arbor, Mich. “Now they are making progress both in the product area and the financial area.”
Mr. Marchionne has said that interest payments on its government loans were the only obstacle keeping Chrysler from being profitable in 2010, when the company lost $652 million.
Paying off the loans would also free Fiat to raise its ownership stake in Chrysler.
Fiat currently owns 30 percent of Chrysler, a stake it received in stages as part in the United States government’s rescue of the smallest of Detroit’s Big Three. In exchange for the ownership interest, Fiat agreed to provide engines and technology to make Chrysler’s lineup more diverse and fuel-efficient.
Once the government loans are retired, Fiat plans to pay $1.3 billion for newly issued Chrysler shares, raising its ownership stake to 46 percent.
That deal will most likely accelerate the integration of Fiat and Chrysler and speed the arrival of new Fiat-based models for Chrysler to sell in the American market.
The refinancing is also expected to save money overall for Chrysler, which is paying high interest rates on the $5.8 billion it owes to the American government and the $1.7 billion it owes the Canadians.
“It’s great they are tuning up their balance sheet by reducing debt,” said Rebecca Lindland, an analyst with the research firm IHS Global Insight. “That will help them direct more money towards product development.”
Under Mr. Marchionne’s leadership, Chrysler has methodically improved its core products since coming out of Chapter 11. In the last year, Chrysler has introduced new, well-received versions of its Jeep Grand Cherokee sport utility vehicle and the Chrysler 300 flagship sedan.
The company has also benefited from positive reaction to its “Imported from Detroit” ad campaign that promotes its corporate resilience and improved product quality.
So far this year, Chrysler’s sales are up 22 percent — slightly higher than the 20 percent increase in sales for the overall industry. The increase, however, is almost entirely attributable to improved sales of its Jeep models and Dodge trucks. The company’s domestic market share has remained flat at 9 percent.
But the Fiat influence will be felt soon. Chrysler has just started to sell the Fiat 500 minicar in its American dealerships, and more new passenger-car models are in the pipeline.
Chrysler needs a more balanced portfolio to take advantage of the steady rise in popularity of smaller cars. The Ford Motor Company reported a sparkling $2.5 billion first-quarter profit on Tuesday, largely because of the success of its new Fiesta and Focus cars.
“Chrysler is in a better position now than a year ago, but they are still reliant on trucks versus cars,” said Ms. Lindland.
Paying back the government loans will leave the federal government’s ownership stake in Chrysler unchanged at 8 percent. But the new debt structure is considered a vital step toward a public stock offering by the company this year or in early 2012.
The majority owner of Chrysler is the health care trust for retired members of the United Auto Workers union, which has a 55 percent stake.
Chrysler has not suffered the same consumer disapproval that General Motors experienced from its government bailout. That was mostly because of G.M. came out of bankruptcy with the American taxpayer as its majority owner.
But G.M. has mostly shed its dreaded image as “Government Motors” since the federal government cut its stake to 26 percent from 60 percent in G.M.’s stock offering last November.
In Chrysler’s case, its biggest problem was a weak lineup of vehicles and tight constraints on product spending. But it now appears to be gaining momentum with new Fiat models.
Analysts who had written off Chrysler after bankruptcy are now applauding Mr. Marchionne’s slow, steady rebuilding of its product portfolio.