Thursday, December 18, 2008

Chrysler Financial May Curb Loans as Dealers Tap Cash (Update2)

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By Greg Bensinger and Mike Ramsey

Dec. 17 (Bloomberg) -- Chrysler LLC’s credit arm said it may temporarily halt the loans used by dealers to buy vehicles as the retailers pull money from an account that helps finance their borrowing.

Losing access to the lending, known as floorplan, from Chrysler Financial would be a blow to dealers struggling with a 28 percent plunge in 2008 U.S. sales. Dealers put money into the account to pay off loans early. They get a 2 percent bonus if the cash stays in the fund for a set period of time, while still being able to pull it out and make scheduled repayments instead.

Almost $60 million a day is flowing from the account, a rate “that is troubling,” Chrysler Financial Chief Executive Officer Thomas Gilman wrote to dealers on Dec. 12. More withdrawals may “force us to suspend wholesale financing.”

“All the dealers got scared when Chrysler started talking about bankruptcy in front of Congress, and they pulled their money out,” said Dick Mullen, a Chrysler dealer in Southold, New York. “If a dealer can’t get floorplan from Chrysler there’s almost nowhere else to turn. It’ll be a disaster.”

Withdrawals from the fund have totaled more than $1.5 billion since July, Gilman wrote. That adds to the cash squeeze at Chrysler and Chrysler Financial, which are both owned by New York-based buyout firm Cerberus Capital Management LP.

“Chrysler Financial finances 75 percent of all vehicles shipped to U.S. dealers and will continue to support our dealer body with uninterrupted wholesale financing,” Amber Gowen, a company spokeswoman, said today.

Pressure on Chrysler

Chrysler is being pressed by a small number of suppliers for payment in advance as it seeks federal assistance to avoid running out of cash as soon as year’s end, people familiar with the matter said last week. Auburn Hills, Michigan-based Chrysler has said it needs $4 billion to operate to March 31.

Gilman said Chrysler Financial has been in talks for more than a month with the U.S. Treasury Department and the office overseeing the Troubled Asset Relief Program to help “break the logjam” in the market for so-called asset-backed securities such as car loans.

That may help Chrysler Financial “in the form of liquidity to fund wholesale and retail loans,” Gilman wrote.

Auto lenders raise capital by issuing securities backed by car loans, enabling them to offer more credit.

Separately, Chrysler said yesterday it joined a financing program with about 2,500 credit unions to offer low-cost auto loans to buyers in 12 states. Under the program, consumers are eligible for rebates of as much as $1,000.

The credit unions have said they have pledged as much as $12 billion to the program, which runs to June 30. U.S. industrywide auto sales fell 16 percent through November.

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