Market now values buyout debt at 61 cents on dollar
DETROIT (Reuters) -- Several hundred million dollars of loans to Chrysler LLC have been sold off by one of its underwriters at a deep discount.
The bargain basement debt sale underscores the mounting pressure on both the struggling automaker and its bankers since a $7.4-billion deal to take it private last year.
The sale of Chrysler by Daimler AG to Cerberus Capital Management LP was funded in part by a $7-billion term loan that was led by J.P. Morgan, Bear Stearns, Goldman Sachs, Citi and Morgan Stanley.
But since November, the banks have been struggling to reduce their exposure to Chrysler, which now faces the prospect of a far weaker U.S. auto market than analysts had expected at the time the Chrysler deal closed.
Chrysler, which lost $1.6 billion last year, no longer discloses financial data as a private company, making the more than 20 percent yield on its debt in the secondary markets one of the few available measuring sticks for its performance.
Chrysler and Cerberus had no immediate comment. Chrysler holds an 80 percent stake in the automaker -- Daimler retained the other 20 percent.
On Wednesday, several hundred millions of dollars in Chrysler debt was sold by one of the underwriters to an investor group near 61 cents on the dollar, sources told Reuters.
Turmoil on the market
The sale price reflects Chrysler's difficulties, the auto industry turmoil and the imbalances of the capital markets, said Chris Donnelly, an analyst at Standard & Poor's leveraged commentary and data unit, a group separate from the ratings service that tracks leveraged finance markets.
"What it says about Chrysler is that the market is interpreting the company's debt as reasonably impaired and it also acknowledges that there is a tremendous technical imbalance in the debt capital markets," Donnelly said. "There is far more of this paper than anybody wants."
The Chrysler loans carried an actual "coupon" interest rate near 6.71 percent as of Wednesday. But with the steep discount, the yield on the share of the Chrysler loan that sold was more than 20 percent.
In November, Chrysler's underwriting syndicate had looked to unload about $4 billion in loans and had been seeking to sell the loans at closer to 97 cents on the dollar at that time.
In early March, amid a tightening of the global credit markets, the underwriters again tried to place Chrysler debt near 74 cents to 76 cents on the dollar, sources have said.
Industry-wide U.S. auto sales dropped 12 percent in March continuing a decline blamed on shaky consumer confidence, high fuel prices and a concern that the housing market downturn could turn into outright recession. Industry sales for the first quarter were down 8 percent.
Chrysler's U.S. vehicle sales for the first three months of the year were down 14 percent from a year earlier.
Steps being taken
The No. 3 U.S. automaker has taken a number of steps to accelerate its cost-cutting efforts under CEO Bob Nardelli in the past several months.
Those include steps to mandate a two-week company-wide shutdown this summer, restrict the number of employee discounts on new vehicles and close its California design studio.
The UAW has indicated Chrysler is likely to fall short of its target of cutting up to 10,000 factory jobs through buyouts currently on offer.
The company has also detailed plans to thin its truck-heavy product line-up, boost overseas sales and reduce the number of U.S. dealerships that represent its Chrysler, Jeep and Dodge brands.
Report: Cerberus looks at banking assets
In a related development, Cerberus has been assembling its resources with a view to buying some banking assets, the New York Post reported, citing people familiar with the matter.
Cerberus has about $7 billion in free cash to invest, the Post said, citing sources.
The firm has been looking into loan and property portfolios of certain regional banks, even as the financial sector is rocked by the credit crunch, the report said.