Wednesday, July 25, 2007

Chrysler Drives Credit Risk Concern

Last Update: 25-Jul-07 12:47 ET

Making headlines Wednesday is news that Daimler's (DCX 92.24 +2.80) $20 billion sale of its Chrysler unit was in jeopardy of not getting done due to a lack of investor interest. Speculation of the deal's failure temporarily caused a drop in the broader markets, in particular the Financials, on heightening concerns over a less favorable credit market.

After failing to find investors, the underwriting banks, led by JP Morgan (JPM), will be assuming the $10 billion of debt while Cerberus and DaimlerChysler agreed to buy the remaining $2 billion. The implications of this news are clear. The assumption of the debt not only increases the risk exposure for these banks, but it also points to a market that has become more risk averse.

The failure to find investors to fund the deal is raising concerns, for good reason. The move from a seller's to a buyer's market has implications on LBO activity. If this occurs and the entire credit market is repriced, it will have a significant impact on M&A activity, which has placed a premium on the broader market and could create a domino effect that could ultimately slow economic growth.

The banks state they will go back to the market when market conditions improve. Chrysler had raised interest rates twice in order to entice buyers, to no avail. The general concern is the subprime mortgage market troubles will cause a contagion that will spill over to the corporate market.

JPM's CEO Jamie Dimon described the drop-off in demand as "a little freeze," while Pacific Investment Management Co's (PIMCO) Chief Investment Officer Bill Gross said yesterday that lenders are "frozen" and "absolutely nothing is moving."

At the end of the day, the Chrysler development provides another reminder that the near-term downside risk for the market has increased due to the uncertain credit environment.

No comments: