A wait for Chrysler deal financing
Banks confirm $12 billion debt delay; would-be buyer Cerberus still expects to close the deal this quarter.
NEW YORK (CNNMoney.com) -- In talks important to both Wall Street and Detroit, attempts by Chrysler to tap debt markets for $20 billion needed to finance a private equity buyout of the troubled automaker have run into trouble because of soft investor demand.
Bankers confirned Wednesday that they were forced to postpone a $12 billion syndicated loan, part of the funding needed to finance the deal, according to Reuters.
The Wall Street Journal earlier reported that bankers have begun discussing the likelihood that they themselves will have to loan a large part of the financing needed by private equity firm Cerberus Capital Management to complete the deal. The money will be used to fund Chrysler's money-losing auto operation and its finance unit after it is separated from DaimlerChrysler (Charts).
Cerberus said Wednesday it expects to close its $7.4 billion acquisition of Chrysler in the current quarter as planned, Reuters reported. Daimler said earlier it remained confident the sale would close in the current quarter.
"Nothing has changed in terms of the deal closing," said Peter Duda, a spokesman for Cerberus, told Reuters.
Daimler is essentially paying additional money itself to get out from under Chrysler's ongoing losses and long-term health care obligations to its employees and retirees.
Chrysler's bankers - including J.P. Morgan Chase (Charts, Fortune 500), Goldman Sachs Group (Charts, Fortune 500), Citigroup (Charts, Fortune 500), Bear Stearns (Charts, Fortune 500) and Morgan Stanley (Charts, Fortune 500) - have spent the past month trying to convince investors to buy $12 billion in loans for Chrysler's auto business and $8 billion in loans for its financial arm.
But the Journal, citing unnamed people familiar with the matter, reported that underwriters of the debt sale were discussing plans Tuesday to take a half or more of a $10 billion piece of the Chrysler auto loan.
The financing of the deal is being closely watched as another sign of whether the relatively cheap and easy financing used by private equity firms in their buying binge of recent years is drying up.
Financier Wilbur Ross told CNNMoney.com this week that he was closely watching the financing of the Chrysler deal and it would be an important test for debt markets.
"The test cases are the ones that are in process, like the Chrysler deal," he said. "When we see the eventual outcome of that, it will be a very good indicator. "
PIMCO's Bill Gross, the manager of the world's largest bond fund, wrote in his most recent commentary on his Web site that the Chrysler deal is showing that debt problems are far worse than the rising defaults and delinquencies in securities backed by subprime mortgages, which had earlier shaken the markets.
"Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week," he wrote. "That more than anything else may wake them, shake them, and tell them that their world has suddenly changed."
That trend of private equity firms buying companies has been an important driver of rising stock prices that has taken blue chip indexes such as the Dow Jones industrial average and the S&P 500 to a series of record highs this year.
The Chrysler deal is not the only one in the auto sector that has run into a difficult market for its debt. The Journal reported Wall Street firms Monday postponed a sale of $3.1 billion in loans that would pay for the leveraged buyout of General Motors' (Charts, Fortune 500) Allison Transmission unit by private-equity firms.
Both the Allison sale and the Chrysler deal are expected to close, even if bankers have to hold more of the debt themselves and borrowers have to pay higher rates, the paper reports. But the difficulties in the debt market are another blow to the U.S. automakers' attempts to restructure their core North American auto operations and stem ongoing losses there.
The automakers this week started labor negotiations with the United Auto Workers union on a crucial labor deal to replace the one that expires Sept. 14. Many are expecting them to propose putting billions into union control trust fund or funds to cover $100 billion in liability for future retiree health care costs. But they will be need to sell assets or access debt markets to set up those funds.
In addition Ford Motor (Charts, Fortune 500), which has already mortgaged many of its plant and equipment to fund a turnaround plan, is looking at possibly selling its Jaguar and Land Rover brands to raise cash. The problems at Chrysler could cause problems for those plans, the paper reported.
"Low interest rates and plentiful capital are the key enablers to Detroit's restructuring," auto consultant John Casesa told the paper. Casesa advised a consortium of investors that bought Ford's Aston Martin unit in a deal that closed earlier this year.
Chrysler moves to trim dealerships
Separately, the Journal reports that Chrysler Group is moving to trim its dealership ranks.
The paper reports it is warning some of its weakest dealers that it may attempt to shut them down if they don't improve sales within six months. The paper said the move is driven by the new owners at Cerberus, which it says has discussed the need to slash dealer ranks with Chrysler executives as well as some of Chrysler's top dealers.
The paper reports that about 40 to 50 Chrysler, Dodge and Jeep dealers in the Great Lakes region that have been missing monthly sales goals received letters from the automaker earlier this month saying they must improve their performance within 180 days or the company would begin the process to "terminate" their franchises.
It reported that similar letters are expected to go out to other low-volume dealers across the country in the next few weeks.
And trade publication Automotive News earlier reported that 450 underperforming dealers were prevented from buying used cars at its factory auctions, a move to force them to sell more new cars.
Cutting dealership ranks is difficult for automakers to do, as state franchise laws typically favor the dealers, who are independent businesses. But years of declining market share have left Chrysler, GM and Ford Motor with a surplus of dealers, which can lead to price wars for the automakers' products.
The paper reports that GM has about 280 dealers for every point of U.S. market share, while Ford and Chrysler have about 270. By contrast, Toyota Motor (Charts) has about 1,400 dealers and 16 percent market share, which gives it only about 90 for each market-share point.