Chrysler repays $7.6bn US, Canada loans

Chrysler Group LLC on Tuesday paid back USD 7.6 billion in US and Canadian government loans from its 2009 bailout, a move that allows the US automaker to distance itself from an unpopular bailout and deepen its ties with Italian automaker Fiat SpA.

At an assembly plant in suburban Detroit, where Chrysler builds the Chrysler 200 and Dodge Avenger cars, hundreds of Chrysler workers marked the event by sporting red, white and blue buttons that read: "Paid. May 24, 2011." Sergio Marchionne, the chief executive of both Chrysler and Fiat, told the crowd: "We received confirmation this morning at 10:13 a.m. from Citigroup that Chrysler Group repaid, with interest ... every penny that had been loaned less than two years ago." Chrysler said it transferred USD 5.9 billion to the U.S. Treasury and USD 1.7 billion to the governments of Canada and Ontario to repay loans it received in June 2009. In London on Tuesday, President Barack Obama called the payback a "significant milestone" and a sign the U.S. auto industry was recovering. The repayment puts Chrysler on firmer financial ground and draws it closer to Fiat, two goals that investors and bankers have said would make Chrysler more attractive in an initial public offering that could come this year or next. The automaker said it repaid the original loans in full, more than six years ahead of schedule. Under the original terms, Chrysler had until 2017 to repay the debt. "Paying back the loans, along with the financial community's investment in our refinancing packages, marks another step in the company returning as a competitive force in the global automotive industry," Marchionne said in a statement. To repay the loans, Chrysler swapped out government debt with cheaper debt from institutional investors. The move does not leave the company with any less debt on its books, but Chrysler said the refinancing would save it an estimated USD 350 million a year in interest expenses. The automaker paid more than USD 1.2 billion in interest on its debts in 2010. Marchionne's frustration with the terms of the government loans seemed to bubble over earlier this year when he denounced them as "shyster loans." Chrysler has not completely ended its government involvement. The U.S. Treasury said it continued to hold a 6.6 percent common equity stake in Chrysler, and that it did not expect to fully recover its remaining outstanding investment of USD 1.9 billion in the automaker. Wall Street's faith Chrysler's ability to pull off a deal at all is a sign of Wall Street's renewed faith in the company, which was nearly left for dead two years ago at the height of the financial crisis. "When we did this deal back in 2009, we couldn't have borrowed a buck from a 7-Eleven store -- the banking system was shut," Marchionne said earlier this year. A sharp drop in auto sales pushed the Auburn Hills, Michigan-based company to the brink of collapse in 2009 before its federal bailout. U.S. Treasury officials were initially divided on saving the company, but ultimately decided to prop it up to preserve jobs. Chrysler emerged from bankruptcy nearly two years ago under Fiat's management. Marchionne was a central figure in laying the groundwork for the Chrysler deal in 2009. He refused to have Fiat put up any cash for Chrysler. Instead, the U.S. Treasury devised a series of tests that allowed Fiat to raise its stake. Over time, Fiat can increase its stake to 76%, according to a recent regulatory filing. As a result of Tuesday's loan repayments, Fiat's stake rose to 46%. This puts Fiat within striking distance of its 51% goal in 2011. Once Chrysler develops a vehicle that gets 40 miles per gallon on a Fiat platform -- a development expected in the fourth quarter -- Fiat can go to 51%. Fiat-Chrysler integration Marchionne can also bolster Fiat's earnings by moving quickly to integrate its operations with Chrysler's, analysts said. Bernstein Research analyst Max Warburton said there was little obvious commonality between Fiat's production of small cars in Italy and Poland and Chrysler's pickups in Michigan and Mexico. "But Marchionne seems determined to make this work and is pushing the companies together far faster than any previous example of M&A," Warburton said in a May 19 research note. Chrysler's lineup, which is heavily skewed toward pickup trucks, minivans and SUVs, remains a concern for investors at a time when pickup sales are faltering. In the first quarter, Chrysler's U.S. market share was 9.1%, tracking below the 10% goal for the year. In addition, meeting upcoming federal fuel economy standards is expected to be a challenge for the company. Funds from the Department of Energy would help the company meet those standards. "Chrysler is not yet fixed," Warburton said. "But it is clearly in a much better place than we could have guessed 18 months ago."