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Chrysler May Pay Back Loans Early to U.S., Canada Governments, Chief Says

December 7, 2010
4 min to read


Chrysler Group LLC, the U.S. automaker operated by Fiat SpA, may repay its U.S. and Canadian government loans before 2013, allowing the Italian automaker to take a 51 percent stake, the companies’ top executive said.


“It’s one of the options that we’re looking at,” Sergio Marchionne, who is chief executive officer of both Chrysler and Fiat, said yesterday. “It’s not required to go public.”

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Fiat, which holds 20 percent of Chrysler, aims to increase that stake to 35 percent next year by achieving milestones outlined in the Auburn Hills, Michigan-based automaker’s restructuring last year, Bloomberg reported. Marchionne said on Sept. 16 that he will probably take Chrysler public in the second half of 2011.


The CEO has also said he wants to improve Chrysler’s capital structure before the initial public offering and that it may include refinancing the automaker’s U.S. and Canadian government loans, which have effective interest rates as high as 20 percent. Interest payments have kept the company from posting a net income, he has said.


Fiat rose as much as 41 euro cents, or 3 percent, to 13.98 euros and was up 2.7 percent as of 11:57 a.m. in Milan trading. The stock has gained 36 percent this year, valuing the Turin, Italy-based carmaker at 16.7 billion euros ($22 billion).


$7.46 Billion Owed


The face value of Chrysler’s debts to the U.S. and Canadian governments is about $7.46 billion. Some of Chrysler’s government loans mature by the end of next year while the majority mature in 2017, according to the U.S. company’s third- quarter financial statement.

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Repaying those loans would allow Fiat to exercise an option to buy an additional 16 percent of Chrysler’s equity and raise its position to a 51 percent majority. Fiat may save as much as $2 billion by doing so before holding an IPO of Chrysler stock, Barclays Capital said last week in a research report whose lead author was Kristina Church, an industry analyst.


Fiat can’t raise its position beyond 35 percent until 2013, the Italian manufacturer has said.


It may be possible for Fiat to take advantage of the 16 percent option before 2013 if it pays off the government loans first, Church said in the note, co-written with Brian Johnson, another Barclays analyst. Fiat executives have been traveling across Europe to promote the spinoff of the Fiat Industrial SpA heavy-truck and tractor business.


‘We’ll See’


Asked if Fiat wants to use the 16 percent option in advance of a Chrysler IPO, Marchionne said: “We’ll see.”

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The reduction of Chrysler’s interest cost and creating a stable capital base are more important than increasing Fiat’s ownership stake, Marchionne told reporters yesterday while visiting a Chrysler plant in Sterling Heights, Michigan.


“My option is not going to die tomorrow,” he said.


Prices for the Chrysler stake are based on multiples of earnings before interest, taxes, depreciation and amortization, or Ebitda.


“Fiat has the option to acquire another 16 percent of Chrysler for a multiple, if it is pre-IPO, that does not exceed Fiat’s own multiple -- which, after the spin-out and a potential sale of Ferrari, is likely to be well below that of” U.S. peers such as Ford Motor Co., Church said.


Her report goes on to say that if Fiat were “to wait until after an IPO to exercise its 16 percent option, it would likely pay a higher multiple than its own multiple.”

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IPO’s Timing


Fiat has leverage to encourage such a scenario through its ability to delay the Chrysler IPO until after January 2013, Church said.


“If any of the non-Fiat stakeholders want to see an IPO prior to 2013, Fiat could require them to consent to a refinancing and repayment of the government loans to allow Fiat to exercise its option,” Church said.


Chrysler’s majority shareholder is the United Auto Workers union trust for retiree health care.


Marchionne is spinning off Fiat Industrial to focus on carmaking and the Chrysler turnaround after the U.S. automaker’s bankruptcy reorganization last year.

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Fiat may sell its auto-parts division Magneti Marelli SpA and a stake in Ferrari SpA before consolidating with Chrysler, analysts, including Erich Hauser of Credit Suisse, have said Marchionne told them.


Sterling Heights Investment


Marchionne spoke yesterday at an event celebrating the production of the new Chrysler 200 and refreshed Dodge Avenger midsize sedans. Chrysler invested $850 million in the Sterling Heights plant for a new paint shop, machinery and other equipment, a decision that reversed a plan to close the factory. A second shift is slated to begin in the first quarter of 2011.


The plant will get new midsize cars in 2013, Marchionne said. The company hadn’t specified the vehicle type before.


He also said Chrysler’s assembly plant in Detroit, which makes the Jeep Grand Cherokee, will begin building a Maserati sport-utility vehicle in 2012.

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