Chrysler deal may produce $70 billion in corporate debt

Reuters |
May 15, 2007 - 4:00 pm

NEW YORK (Reuters) -- Cerberus Capital Management may tap the asset-backed, junk bond and bank debt markets for as much as $70 billion to complete its acquisition of the Chrysler group from DaimlerChrysler AG, analysts said.

Proceeds from refinancing debt at Chrysler's financing unit would compensate the DaimlerChrysler parent for the existing debt as assets are transferred to the new Chrysler, said Philip Watkins, a credit analyst at Commerzbank in London.

The mix of financing could include about $30 billion in auto asset-backed securities (ABS), some $10 billion in unsecured high-yield corporate debt and the rest in bank loans, he said.

No company has ever tapped the ABS or junk-bond markets in such size. The move would create bold precedents by the New York based private equity firm that last year bought a majority stake in another big ABS issuer, General Motors' GMAC.

Ford Motor Co. in 2005 securitized about $9 billion in ABS, including one $4.5 billion issue that forced yields on existing bonds slightly higher as they flooded the market, said an analyst at a New York-based bank.

"There is strong demand for high-quality assets from quality servicers" so it is possible that Chrysler could tap the ABS market, the analyst said.

But unknowns such as the debt's affect on Chrysler's balance sheet and underlying ratings limit the scope of speculation, she said.

The $202 billion auto ABS market has been shrinking from the peak of $235 billion in 2003, according to the Securities Industry and Financial Markets Association.

DaimlerChrysler on Monday said Cerberus would buy 80.1 percent of money-losing Chrysler.

Cerberus plans to invest $5 billion for improvements in the automotive group and put $1.05 billion into the financing unit, DaimlerChrysler said. The private equity firm will pay an additional $1.35 billion to DaimlerChrysler.

A possible $65 billion refinancing was first reported by the Wall Street Journal, citing people familiar with the deal. A spokesman for Cerberus didn't immediately return a phone call or an e-mail.

The new Chrysler would likely be a "BB," junk-rated entity compared with the current "BBB" investment-grade rating enjoyed by DaimlerChrysler, DaimlerChrysler CFO Bodo Uebber said on a conference call, a transcript shows.

The lower rating would equate to higher borrowing costs, pushing Cerberus toward the automobile ABS market where collateralized bonds can garner ratings as high as "AAA."

Securitization may be "a large portion because of the cost effectiveness, but I'd still expect to see some unsecured debt because it's not a disastrous rating," Watkins said.

DaimlerChrysler competitors Ford and GMAC are frequent issuers of auto ABS. The companies have also been selling auto loans outright to free up capital that must be held on balance sheets to cover residual interests in securitizations.