Chrysler may see cash squeeze from finance arm costs

By Poornima Gupta

DETROIT, July 21 (Reuters) - Chrysler LLC could face a squeeze in cash as higher borrowing cost for its finance arm would make it more expensive for the struggling U.S. automaker to offer cheap loans and other discounts to buyers.

Chrysler Financial's $30 billion credit facility, used to finance the automaker's vehicle sales, is up for renewal in early August and the lender could could see its borrowing costs rise amid the continuing credit market turmoil, a source familiar with the situation told Reuters.

Higher borrowing cost for the lending arm means it would be more expensive for Chrysler to offer zero-percent loans and other rebates to consumers, increasing Chrysler's cash burn, said Kam Hon, a credit analyst at DBRS.

"It will hurt their margins," Hon said. "It will definitely put a dent on Chrysler's (financial) performance."

Chrysler and other automakers offer loans to consumers for vehicle purchases and lend money to dealers to finance their inventory through captive lending arms.

Chrysler Financial has a $70 billion portfolio comprising loans to consumers and dealers, spokesman Bill Porter said, adding that the company is still finalizing details of the credit facility's renewal and it was too early in the process to talk about any impact on the company.

Chrysler, pushing to turn around its operations nearly a year after being acquired by private equity firm Cerberus Capital Management LP, is currently offering zero percent financing for six years on some 2008 Dodge Ram pickup trucks. It also has thousands of dollars in cash incentives on many of its vehicles.

A Chrysler spokeswoman said on Monday the automaker will continue to offer competitive finance and lease offers for its customers and dealers.

Chrysler, which lost $1.6 billion in 2007, has said it ended the year with $9 billion in cash. Its U.S. sales are down 22 percent so far this year.

Liquidity concerns for Chrysler have been rising as evidence grows that the downturn in U.S. sales that began earlier this year has accelerated in the face of record gas prices and a consumer defection from trucks and SUVs.

Last month, Chrysler drew down a $2 billion credit line from Cerberus and Daimler AG, the German car maker that sold off a roughly 80 percent stake in Chrysler to Cerberus last year.

Himanshu Patel, analyst with JP Morgan, said Chrysler faces the highest liquidity risk among the U.S-based automakers.

If U.S. industry volumes fail to recover, Chrysler could face a "liquidity event" around the second half of 2009, he said in a recent research note.

The automaker last month had to deny rumors it was facing a cash crunch. The company sent a letter to dealers earlier in July saying that reports of its financial distress were unfounded.

Chrysler is also closing a minivan plant and eliminating one shift at a Dodge Ram truck plant in Missouri due to weak demand.

Chrysler's troubles comes as larger rival General Motors Corp detailed plans last week to cut costs by $10 billion in a bid to shore up cash and survive a deep industry slump.

The world's largest auto market is reeling from an unprecedented combination of record gas prices, tighter credit and a housing market collapse.

U.S. auto sales this year are on track to plunge to near-decade lows. Automakers have abandoned hopes for a second-half recovery and some analysts are now saying investors will have to wait until 2010 for signs of a rebound.