Chrysler sale is still on fast track

Deal should be completed in the third quarter despite financing concerns about a suddenly cool bond market.

Christine Tierney and Bill Vlasic / The Detroit News

DaimlerChrysler AG CEO Dieter Zetsche said Wednesday the company still expects to close the sale of Chrysler by the end of September even though a nervous mood in the bond market hampered efforts to line up financing for the Auburn Hills automaker.

A group of six banks acting for Cerberus Capital Management LP, the buyer of Chrysler, cancelled plans to sell $12 billion in loans for Chrysler's auto business after failing to interest investors.

But the banks, which include J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., were still proceeding with the sale, at higher rates, of $8 billion in debt for Chrysler's profitable loan-financing division.

The investors' frosty response to the loan sale will raise the cost of the $7.4 billion deal to sell Chrysler but will not jeopardize it, financial analysts said.

It may, however, put a damper on other highly leveraged deals by private-equity firms. The financing for another private-equity deal, the sale of General Motors Corp.'s Allison Transmission to Carlyle Group and Onex, also has run into difficulties.

Still, sources close to the Chrysler deal said Wednesday that they expected the sale to close in the second week of August.

During a teleconference with reporters and analysts, Zetsche declined to comment on the financing difficulties but said he expected the deal would be completed during the third quarter, which ends Sept. 30.

"We are completely within the anticipated time schedule for the closing," he said on a call to discuss second-quarter financial results for soon-to-be Daimler AG's Mercedes Car Group and commercial vehicles division. "We therefore expect the closing of this transaction will take place in Q3, 2007, as we indicated."

Cerberus also declined to discuss the financing efforts. "The deal is going to close on time," Cerberus Managing Director Tim Price told The Detroit News.

Joe Phillippi, president of AutoTrends Consulting Inc. in Short Hills, N.J., expects the deal will go through, albeit at a higher price, "barring some really big, negative extraneous event."

The six banks have underwritten $20 billion in loans to finance Chrysler's operations after the sale. In such deals, banks typically sell part or all of the loans in the debt markets. But investors are nervous now because of the recent slump in bonds backed by subprime mortgages.

In recent weeks, more than 30 companies have pulled or revised deals, including the proposed sale of $10 billion in loans for Kohlberg Kravis Roberts & Co.'s buyout of the British firm Alliance Boots Plc. It was scrapped Wednesday.

The banks involved in the Chrysler deal will fund $10 billion of the loans directly, according to Bloomberg News, while DaimlerChrysler and Cerberus will each lend Chrysler $1 billion.

Analysts say the banks will probably have to offer higher rates to sell the debt in the future.

"The bond market right now is not in great shape. Trying to get anything financed is difficult since the subprime market blew up," said auto analyst Bradley Rubin at BNP Paribas in New York.

"The banks are taking significant risk here. Cerberus and DaimlerChrysler are taking additional risk, but not as much as the banks," he said.

A source close to the deal said the mood in the bond market would slow down the sale of the debt. "The banks are trying to sell the debt, and the market is tough. It's going to be more expensive to finance the deal," the source said.

The difficulty may dampen private-equity interest in automotive assets, many of which are now undervalued. "It's not going to help," Rubin said.

The Chrysler deal marks the first sale of a U.S. automaker to a private-equity firm, but private buyers are eyeing Ford Motor Co.'s Jaguar and Land Rover brands.

Previous deals involving auto suppliers include the acquisition of TRW Automotive by Blackstone Group, the purchase of Delphi Corp. by a group of investors led by Appaloosa Management, and the acquisition of Dana Corp. by Centerbridge Capital Partners.

But the banks arranging the buyout of Allison Transmission this week cancelled a planned sale in the debt market of $3.1 billion in loans to support the deal.

While the lack of investor interest in the loans backing Chrysler's auto operations primarily reflects the weakness in the bond market, investors are probably discouraged by gloomy industry trends, Phillippi said. "The sales numbers of late, for all the Big Three, the continued erosion of market share, are one risk factor they take into account," he said.

In negotiating the sale of Chrysler, DaimlerChrysler executives said they favored Cerberus's offer in part because it offered the greatest certainty for a speedy transaction and the best value. Cerberus agreed to pay $7.4 billion for an 80.1 percent stake in Chrysler, with most of the money going into the U.S. automaker and its financial services operation.

Detroit News Reporter David Shepardson contributed. You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.