By Chris Haak
Probably due to its much larger size, GM’s bailout and repayment of some government loans has drawn far more attention than the assistance provided to Chrysler has for the past several years. Chrysler doesn’t even get the perk of a derogatory nickname like “Government Motors” has.
Former “Car Czar” Steven Rattner’s book described how the Obama administration was split nearly 50-50 on whether Chrysler was even worth rescuing, and not everyone is certain of the viability of the now Italian-American automaker in the coming years.
Today, though, the focus is on Chrysler. The company announced this morning that it will repay its loans to the US and Canadian governments, totaling $7.53 billion USD, by the end of the second quarter this year. In other words, they’ll be repaid within about two months. It’s not to say that Chrysler will retire the debt, but rather, it’s refinancing the debt in the public markets. Still, Chrysler repaying its government loans is a much bigger deal than when GM did it a year ago because Chrysler’s rescue was structured very differently than GM’s was.
First, right out of bankruptcy, GM was majority owned by the US Treasury, and only had a few billion dollars in actual loans on the books. Most of the assistance that GM received was in the form of the government acquiring a majority stake in the company. When GM repaid its loans and made a big deal about it, the government was still its majority shareholder, and the loans only represented a portion of the total assistance package. It was pretty clear to almost everyone that GM’s bragging about repaying its loans early was somewhat empty, considering the loans were only a small portion of the total package, and the money to pay them came from the Treasury’s other assistance.
But Chrysler’s rescue wasn’t nearly as heavily equity-based. First, there’s the Fiat stake. GM did not have another auto company holding a large stake the way Chrysler did post-bankruptcy, but Fiat owned a stake in Chrysler. When Chrysler emerged from bankruptcy on June 1, 2009, Fiat was given management control of the company and a 20 percent ownership stake. The UAW (67.69 percent), the US Treasury (9.85 percent), and Canadian government (2.46 percent) owned the rest of Chrysler. There were then milestones built into the agreement that allowed Fiat to receive an increasingly-larger ownership stake in Chrysler.
Fiat currently owns 30 percent of Chrysler; by repaying government loans, Fiat gains the right to purchase 16 percent of Chrysler, which will take its stake to 46 percent. Though Fiat has provided Chrysler with valuable management services and intellectual property, the $1.27 billion USD that Fiat pays for 16 percent of Chrysler will actually be the first and only time that the Italian automaker has to put any of its cash toward Chrysler. Once US production of a 40 MPG vehicle begins – likely sometime this fall - Fiat will receive the final five percent of Chrysler, taking its stake to 51 percent, and giving Fiat control. Marchionne has mentioned a few times that after that milestone, he may merge Fiat and Chrysler under a single global headquarters – which could even be in Auburn Hills, Michigan – but that’s a story for another day. The Italians may have something to say about that as well.
Another key difference in the structure of Chrysler’s financing post-Chapter 11 versus GM’s is that Chrysler was saddled with more debt, particularly proportionate to the overall size of the assistance that each company received. Chrysler’s remaining $7.53 billion in debt to the US and Canadian governments carries a high cost, and not all of that is political/ideological. According to CEO Sergio Marchionne, the government loans carry interest rates as high as 14 percent on US borrowings and 20 percent on Canadian borrowings. Refinancing the debt will cause an immediate reduction interest expenses on the order of between $270 million and $500 million, depending on which analyst does the calculations.
The specific debt issues that Chrysler has in mind are in three pieces:
- A $3.5 billion USD term loan
- $2.5 billion USD in bonds
- $1.5 billion USD revolving credit line
According to Chrysler, the debt will be sold to institutional investors in a private offering. Such a move would avoid the need to undertake the complexity of an SEC registration.
Getting out from under government ownership will have numerous other benefits for Chrysler, besides merely saving money on interest payments. Executive compensation limits under TARP’s rules for companies that received “extraordinary assistance” from the US government go away, so Uncle Sam no longer can tell Chrysler how much it should pay executives, or how those pay packages should be structured. It removes some of the stigma of government ownership from buyers’ eyes. And it sets up the company as a more attractive investment opportunity before it undertakes an IPO, likely to occur in 2012.
We’re never going to recover all of the money that the US Treasury “invested” in the US auto industry during the depths of the Great Recession. Now that capital markets have come back to life, auto industry sales have somewhat recovered, and there is an opportunity for the government to get the hell out of the car business, it’s time to make pragmatic decisions and let these companies run (or not, as the case may be) under private investors.