Cerberus to use $2 billion proceeds for Chrysler

NEW YORK (Reuters) - Private equity firm Cerberus said on Friday it would use the first $2 billion of proceeds from Chrysler's auto financing arm Chrysler Financial to backstop the government loan allocated to its struggling Chrysler car making unit.

President George W. Bush on Friday offered a $17.4 billion government lifeline to ailing automakers General Motors and Chrysler LLC to prevent a deeper economic recession but he demanded they prove by March 31 that they can survive.

Cerberus said in a statement that it has agreed to utilize the first $2 billion of proceeds from Chrysler Financial to backstop the loan allocated to Chrysler automotive.

"In addition to this, Cerberus believes that concessions by all relevant constituencies will be required to facilitate a full restructuring and recapitalization of Chrysler," it said.

Cerberus added that it would contribute its equity in Chrysler automotive to labor and creditors as currency to facilitate the restructuring.

Cerberus cautioned that unless Chrysler's labor costs can achieve parity with the foreign automakers in the United States, and without the restructuring of Chrysler's debt, Chrysler cannot be restored to long-term health and the government loan will be unlikely to be fully repaid.

Cerberus said the Chrysler investment was initially about 7.5 percent of its assets under management and was the single largest investment that Cerberus has ever made.

"This is not 'cash in the bank' and Cerberus is not a deposit taking institution that can act as an ATM machine for its portfolio companies," it said in a statement.

"Consequently, Cerberus does not have the liquidity to fund the loans requested by Chrysler, and for the reasons stated above could not do so even if it had such liquidity at its disposal," it said.

Chrysler was sold by former parent Daimler AG last year in a $7.4 billion deal, unwinding a nearly decade-old merger. Private equity firm Cerberus acquired an 80 percent stake and Daimler retained the other 20 percent.

(Reporting by Megan Davies; Editing by Tim Dobbyn)