Nardelli hemmed in by Cerberus credit crunch

Bradford Wernle
Automotive News

DETROIT — CEO Bob Nardelli and his management team are working on a short financial leash as they struggle to turn around ailing Chrysler LLC.

They're limited to the roughly $10 billion in cash they have on hand. The company can't borrow any more.

That $10 billion figure comes from a financial presentation Chrysler and its owner, Cerberus Capital Management LP, made to investors Nov. 7.

One indicator of Chrysler's tight spot: Cerberus' five major banks have failed twice to find investors to take $4 billion of loans off their books, even though the banks heavily discounted the loans.

The banks, which underwrote $10 billion in loans to Chrysler last summer, have been unable to syndicate all that debt to investors. The banks are JPMorgan Chase, Citigroup, Morgan Stanley, Bear Stearns and Goldman Sachs Group.

The failure to sell the loans has no direct effect on Chrysler operations, analysts say. But they say it shows a lack of confidence in Chrysler and Cerberus.

Nardelli told workers that Chrysler will lose $1.6 billion this year and announced a round of production cutbacks. He also has slashed four vehicles from the future lineup and laid off an additional 10,000 workers. This suggests he is running the company on a tight leash.

In its November presentation to lenders, Chrysler said it is performing ahead of its June 2007 earnings projections. Cerberus financed its purchase of Chrysler Automotive with two loans -- a $10 billion first-lien loan and a $2 billion delayed second-lien term loan. The loans are backed by Chrysler’s plants and property, accounts receivable, inventory and intellectual property.

The deal is similar to the one that CEO Alan Mulally engineered last year to finance Ford Motor Co.'s recovery.

Cutting Chrysler -- On Nov. 1, Chrysler announced cutbacks for the first quarter of 2008, taking out shifts at 5 plants and reducing the hourly work force by 8,500 to 10,000. -- Chrysler will eliminate 4 models by the end of 2008: the Dodge Magnum and the Chrysler PT Cruiser convertible, Pacifica and Crossfire. -- On Feb. 14, Chrysler announced it would cut capacity by 400,000 units, close a plant, trim shifts from others and lay off 13,000 workers, including 11,000 factory workers.

Not 'short of money'

Cerberus, which has $26 billion in assets under management, has been hit been by problems with other investments, including its 51 percent ownership of GMAC Financial Services. GMAC's residential mortgage subsidiary, ResCap, has lost $3.4 billion so far this year because of its large subprime loan portfolio.

Cerberus spokesman Peter Duda said Chrysler is not affected by the banks' failure to sell the loans. "Chrysler has received their money," he said. "The banks are holding

debt. It's not like Chrysler is short of money because of this situation."

Analysts attribute the banks' failure to two factors: the global credit crisis and a lack of confidence in Chrysler as a good investment. Auto analyst John Casesa of Casesa Shapiro Group said Cerberus' other problems don't hurt Chrysler -- at least for now.

"The performance of one business, good or bad, does not have much impact on the amount of capital that goes into other businesses," he said. "Of course, over time if you have a lot of bad investments, you won't be able to raise capital for other businesses."

The inability of the banks to unload the loans "doesn't reflect well on Cerberus," said an analyst who spoke on condition on anonymity. "Chrysler has a long, checkered financial history."

The same analyst estimates that Nardelli and his team have only three or four years to fix Chrysler.

Chrysler's $10 billion cash hoard compares with the $26.4 billion General Motors had at the end of the third quarter, excluding funds set aside for its Voluntary Employee Benefits Association for Chrysler retirees' health care. Ford ended the third quarter with $35.6 billion in cash, before setting aside VEBA funding.

On target

Nardelli says Chrysler's turnaround is on target. Last week, he said Chrysler will maintain capital expenditures at current levels for 2008. That would be about $3.7 billion, according to an estimate based on Chrysler's 2006 expenditures. He said Chrysler has been "aggressively conservative" in cutting production to get it in line with market share.

Since Cerberus took over in August, Nardelli has ratcheted up the layoffs and production cutbacks.

On Nov. 1, Chrysler announced more cutbacks effective in the first quarter of 2008, taking out shifts at five plants and reducing the hourly work force by a further 8,500 to

10,000. According to CSM Worldwide, Chrysler will cut production in the first quarter by 15 percent.

Those cuts are in addition to those announced last Feb. 14. That day Chrysler, then part of DaimlerChrysler AG, said it would cut annual capacity by 400,000 units, close a plant, trim shifts from others and lay off 13,000 workers, including 11,000 factory workers. According to the Harbour Report, Chrysler's North American capacity was 2,794,131 units in 2006.

Nardelli knows Chrysler has to keep close to its plan: "This is an industry that can burn cash very quickly."