Chrysler said today it intends to pay off its $7.5 billion in government loans by selling new debt, an investment from Fiat and a new loan agreement with institutional investors.
The Auburn Hills-based automaker said it plans to use the proceeds of the term loan and the debt offering, with the $1.27 billion that Fiat said it would invest in Chrysler last week to acquire an additional 16% in Chrysler to pay off the government loans.
Chrysler owes $5.8 billion to the U.S. Treasury and $1.7 billion to the Canadian governments as part of a 2009 restructuring that allowed it to emerge from Chapter 11 bankruptcy.
Chrysler said today it plans to complete the repayment by the end of June. Fiat currently owns 30% of Chrysler. The company did not break down the amount of money it is seeking to borrow or say how much new debt it plans to issue through securities.
Today’s announcement comes just a few hours before U.S. Treasury Secretary Timothy Geithner is scheduled to tour Chrysler’s Jefferson North Assembly Plant in Detroit with Fiat and Chrysler CEO Sergio Marchionne. Geithner also is scheduled to speak this afternoon in Detroit to the Detroit Economic Club.
Marchionne has said he wants to refinance Chrysler’s debt because the interest rate is higher than commercial market rates. The effective interest on the borrowings from the U.S. is as high as 14% and as much as 20% on the Canadian debt.
Barclays Capital analyst Brian Johnson said the interest rate on Chrysler’s loans is one of the main reasons its first-quarter operating margin is estimated to be about 6.4% compared with Ford’s 10.1%.
After the refinancing is completed, the U.S. government’s stake in Chrysler is expected to shrink from 9.2% to 6.6%.
More details about how Chrysler plans to structure the deal could be announced on Monday when the company reports first quarter financial results.
The Free Press has previously reported that Chrysler is talking to Goldman Sachs, Morgan Stanley, Bank of America and Citigroup about a deal in which they would underwrite bonds and loans.
Marchionne is in a race to raise Fiat’s stake in Chrysler to 51% as soon as possible. That’s the majority share number he wants to hit before an initial public offering of Chrysler later this year or early in 2012.
To get from 46% to 51%, under terms of Chrysler’s 2009 operating agreement, Fiat must build a vehicle in the U.S. capable of achieving 40 m.p.g. By doing that, Chrysler would meet another threshold in its 2009 agreement with the U.S. Treasury and Canada.
Paying off the government loans also could clear the way for Chrysler to win a loan from the U.S. Department of Energy under a program designed to encourage automakers to invest in fuel efficient technology. Chrysler has applied for a loan that exceeds $6 billion.