Chrysler badly needs cheap loans GM spurns
General Motors Co has taken a big step away from the stigma of its government bailout, just as its smaller rival Chrysler Group LLC furiously lobbies Washington for USD 3 billion in subsidized loans.
January 28, 2011 / 14:25 IST
General Motors Co has taken a big step away from the stigma of its government bailout, just as its smaller rival Chrysler Group LLC furiously lobbies Washington for USD 3 billion in subsidized loans.
GM withdrew its application for USD 14 billion in low-interest loans from the US government on Thursday, saying it had enough cash to fund vehicle development as fuel economy standards tighten over the next five years. But Chrysler, which reports fourth quarter earnings on January 31, has made it clear the same Department of Energy loans GM has spurned are crucial to its turnaround.In 2009, both GM and Chrysler applied for loans through a Energy Department program designed to spur the development of more fuel efficient cars.Chrysler's USD 3 billion loan application is still pending, denying the automaker a chance to refinance its pricey bailout loans before an expected initial public offering this year."It just underlines the special challenges for Chrysler," Sean McAlinden, chief economist for the Center for Automotive Research, said of GM's decision to withdraw its application."They've got another really tough year and they need the money."Adding to Chrysler's challenges is the fact the federal loan approval process appears to have bogged down over collateral that could be pledged by Chrysler.Chief Executive Sergio Marchionne, who expected the money by the end of 2010, said last week he still expected Chrysler would receive the loans."Am I concerned with the fact that this thing is taking longer than I thought? The answer is absolutely yes," Marchionne told reporters.He added that a "tripartite" discussion between Treasury, the Department of Energy and Chrysler would be needed to sort out the issue.'Behind the eight ball'At the height of the financial crisis, US government officials hotly debated whether Chrysler was worth saving. The company ultimately filed for bankruptcy and is now managed by Italy's Fiat SpA.Chrysler's latest vehicles, such as its 2011 Jeep Grand Cherokee, have been well received, but its 2010 lineup ranks last in terms of fuel economy among major automakers, according to the Environmental Protection Agency."They're way behind the eight ball and technology keeps changing," said Patrick O'Keefe, a financial transactions consultant in the auto industry with O'Keefe and Associates. "It's hard to play catch up."Chrysler has said the federal loans could drive a sharp improvement in the fuel economy of its vehicles. But the delay in approval could be costly."There is a point in time when I need to go back to my kitty and start using the other cash to do this, which is not a good answer," Marchionne told reporters last week.The Energy Department's auto loan program was created by Congress in 2007. About USD 25 billion was earmarked for loans to automakers and auto suppliers, but there have been just four recipients: Ford Motor Co, Nissan Motor Co Ltd, Tesla Motor Inc and Fisker Automotive.Interest rates on the DOE loans vary, but Ford pays little more than 3% interest on some loans due in June 2022, according to a 2009 Treasury press release.By contrast, Chrysler pays a 7.22% rate on one tranche of its Treasury loan worth more than USD 2 billion and 10.55% on a slice of debt worth USD 3.54 billion.The low-interest Energy Department loans could allow Chrysler to pay back high-interest loans on the USD 5.7 billion it owes the US Treasury after its bailout.But under the loan program's guidelines, the Energy Department has a first priority lien on any property that is bought or developed using the loans. This means that, if a company goes bankrupt, the agency can lay claim to those assets.The problem is that all of Chrysler's assets are already spoken for by US taxpayers. They secure the billions in financing the US Treasury provided the company after the company's bankruptcy in 2009."Fundamentally, it is a question of how do you make sure that collateral is available for all the people at the table?" Marchionne said last week.It is a tough question. But legal experts said that, if Treasury was convinced the Energy Department loans would improve Chrysler's prospects, they could choose to take a lower position on some portion of the company's assets. But if they are not convinced, Treasury could also stay put, effectively blocking the cheaper source of funds."If I'm Chrysler, I'm going to be screaming because if I can save six points on the interest, that's huge," said Doug Bernstein, a partner at the law firm Plunkett Cooney.Clinching those loans would also help the automaker negotiate better rates on debt from Wall Street's banks, McAlinden said."The DOE loans are fairly critical," he said. "It might save them USD 800- USD 900 mln in interest payments. That's a lot of cash on the line that the private sector would like to see."The US Treasury and Energy Department declined to comment on Chrysler's application. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
