Thursday, July 12, 2007

Debt Uncertainty Complicates

July 12, 2007; Page A2

WALL STREET JOURNAL - - John Snow, the chairman of Cerberus Capital Management LP, yesterday acknowledged that investors have lost some of their appetite for debt at a time when the private-equity firm is trying to raise billions in financing for its planned purchase of Chrysler Group.

Still, Mr. Snow said he expects the buyout group will be able to raise funds needed to take control of the U.S. auto maker.

"The market has lost some of its buoyancy," Mr. Snow said in an interview following a speech in Detroit.

[John Snow]

His comments come amid uncertainty in debt markets, which has raised questions about the ability of buyout firms to continue to tap the credit needed to finance big deals. Debt financing for such deals could become more expensive should buyout firms have to offer significantly better terms.

Investors who sat in on Cerberus's presentations as well as bankers familiar with its offering said the market is taking a cautious look at the company's bid to raise $62 billion for the deal. Potential investors are concerned they could lose the bulk of their money if Cerberus's turnaround of Chrysler fails and the auto maker has to seek bankruptcy protection, these people said.

Cerberus has agreed to take an 80.1% stake in Chrysler in a complex transaction in which the current owner, DaimlerChrysler AG, of Germany, is essentially paying Cerberus to take Chrysler off its hands.

Yesterday, DaimlerChrysler shares temporarily faltered amid market talk that Cerberus was having trouble financing the deal. By the end of the day, DaimlerChrysler stock had recovered to $92.76, down 24 cents in 4 p.m. New York Stock Exchange composite trading.

Mr. Snow, the former Treasury secretary, said he doesn't see a risk to the financing. "We follow this closely, and the people handling the financing and dealing with the banks are committed, so we are confident that this will go through," he said.

Wall Street banks that will help provide financing for Cerberus's acquisition of Chrysler's car arm and its financial arm kicked off a road show more than two weeks ago to raise money for the deal, which is expected to close at the end of July.

J.P. Morgan Chase & Co., Bear Stearns Cos., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley have committed to raising money for the deal. Because of the large amount of financing and challenges facing Chrysler, the fund-raising effort is expected to be closely watched.

Chrysler is recovering from a $1.5 billion loss in 2006 and will begin negotiations this summer -- along with General Motors Corp. and Ford Motor Co. -- in what could be a landmark agreement with the United Auto Workers union.

In May, DaimlerChrysler announced a deal to sell Chrysler to Cerberus. Under the terms, Cerberus will invest $5 billion into Chrysler's auto operations and $1 billion into its financial arm. Daimler will retain the remaining 19.9% stake.

Daimler will have to keep paying off much of the approximately $38 billion in debt already on the books of the two units, which it has guaranteed. Under Cerberus, Chrysler has to borrow money to compensate Daimler and to fund the businesses. That means as much as $50 billion needs to be raised at the finance unit and another $12 billion is needed for the auto operation. Some of the banks involved with financing the deal say they are realizing that they will be the equivalent of equity holders. That means if Chrysler declares bankruptcy, the banks will be the most exposed group.

Early talk on pricing has an 8.6% rate on $10 billion in loans and an 11.4% rate on $2 billion in loans for Chrysler's auto business, according to Standard & Poor's Leveraged Commentary & Data. For Chrysler Financial, an 8.1% rate on a $4 billion loan and a 10.4% rate on a $2 billion loan are being discussed.

--Tom Lauricella and Serena Ng contributed to this article.

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