Chrysler set to repay $7.5 bln U.S., Canada loans

Tue May 24, 2011 10:53am EDT

* Cheaper debt from Wall St to save company $300 mln/year

* Automaker had until 2017 to repay government debt

* Repayment could make Chrysler more attractive in an IPO

DETROIT, May 24 (Reuters) - Chrysler Group LLC was set on Tuesday to repay $7.5 billion in U.S. and Canadian government loans from its 2009 federal bailout, a move that will allow the U.S. automaker to distance itself from an unpopular bailout and deepen its ties with Italian automaker Fiat SpA (FIA.MI).

Under the original terms, Chrysler had until 2017 to repay the debt.

Sergio Marchionne, the chief executive of Fiat and Chrysler, is scheduled to appear at a Chrysler assembly plant in Sterling heights, Michigan, Tuesday afternoon to express thank to the governments for their financial support. Also at the event will be Ron Bloom, the Obama administration's point man on auto restructuring, and General Holiefield, head of the United Auto Workers union's Chrysler department.

Marchionne noted on Monday that Chrysler's repayment of its bailout loans was even faster than that engineered by Lee Iacocca, who led the U.S. automaker through a government bailout in the late 1970s and ran the company through 1992. [ID:nN23198139]

Chrysler paid more than $1.2 billion in interest on its debts in 2010. Marchionne's frustration with the terms of the government loans seemed to bubble over earlier this year when he denounced them as "shyster loans." [ID:nN05153253]

Chrysler is swapping out government debt with cheaper debt from institutional investors. The refinancing will not mean it has less debt on its books, but it will save the company more than $300 million a year in interest expense, Marchionne said on Monday.

Nor will the company have completely ended government involvement. The U.S. Treasury will still own a small percentage of the equity in Chrysler, which Fiat can buy over time.

Yet Chrysler's ability to pull off a deal at all is a sign of Wall Street's renewed faith in the company, which was nearly left for dead two years ago at the height of the financial crisis.

"When we did this deal back in 2009, we couldn't have borrowed a buck from a 7-Eleven store -- the banking system was shut," Marchionne said earlier this year.

The repaymant will put Chrysler on firmer financial ground and draws it closer to Fiat, two things investors and bankers have said would make Chrysler more attractive in an initial public offering that could come this year or next.

A sharp drop in auto sales pushed the Auburn Hills, Michigan-based company to the brink of collapse in 2009 before its federal bailout.

U.S. Treasury officials were initially divided on saving Chrysler, but ultimately decided to prop up the company to preserve jobs. Chrysler emerged from bankruptcy nearly two years ago under Fiat's management.

Marchionne was a central figure in laying the groundwork for the Chrysler deal in 2009. He refused to have Fiat put up any cash for Chrysler.

Instead, the U.S. Treasury devised a series of tests that allowed Fiat to raise its stake. Over time, Fiat can increase its stake to 76 percent, according to a recent regulatory filing.

As a result of the loan repayments, Fiat's stake in Chrysler will rise to 46 percent as of Tuesday. This puts Fiat within striking distance of its 51 percent goal in 2011. Once Chrysler develops a vehicle that gets 40 miles per gallon on a Fiat platform -- a development expected in the fourth quarter -- Fiat can go to 51 percent.

Marchionne can also bolster Fiat's earnings by moving quickly to integrate its operations with Chrysler's, analysts said. Chrysler generates "structurally stronger" profits than Fiat, which relies heavily on Brazil, Cheuvreux analyst Bruno Lapierre wrote in a note.

Bernstein Research analyst Max Warburton said there was little obvious commonality between Fiat's production of small cars in Italy and Poland and Chrysler's manufacturing of pickups in Michigan and Mexico.

"But Marchionne seems determined to make this work, and is pushing the companies together far faster than any previous example of M&A," Warburton said in a May 19 research note.

Chrysler's lineup, which is heavily skewed toward pickup trucks, minivans and SUVs, remains a concern for investors at a time when pickup sales are faltering. In the first quarter, Chrysler's U.S. market share was 9.1 percent, tracking below the 10 percent goal for the year.

Additionally, meeting upcoming federal fuel economy standards is expected to be a challenge for the company. Funds from the Department of Energy would help the company meet those standards.

"Chrysler is not yet fixed," Warburton said. "But it is clearly in a much better place than we could have guessed 18 months ago." (Reporting by Ben Klayman in Detroit and Deepa Seetharaman in Chattanooga, Tennessee; editing by John Wallace)

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