Why is this man laughing? Sergio Marchionne outlines details of the government loan payoff.
Chrysler will use a mix of loan money, new debt securities and a line of credit to repay the $7.5 billion it owes to the U.S. and Canadian governments, the maker announced today, providing the first details on a payback plan first announced last week.
At about the same time, the U.S. maker’s Italian partner, Fiat SpA, will invest $1.27 billion in order to increase its stake in Chrysler from 30% to 46%.
Sergio Marchionne, the CEO of both automakers, has indicated he expects to meet another hurdle set by the 2009 federal bailout to add yet another 5% stake, which would give Fiat a full 51% share of Chrysler. Sometime after that, depending on Chrysler’s financial health and the strength of the stock market, the maker is expected to stage an IPO that would mark its return to public trading.
Details of the loan repayment were announced today at the same time Chrysler revealed it has earned $116 million during the first quarter of 2011, its first net profit since emerging from bankruptcy in June 2011. (For more on Chrysler’s earnings report, Click Here.)
The goal is to pay off $5.8 billion owed to the U.S. government by June 30th, along with another $1.7 billion due to the Canadian treasury. Alternative financing will come from three components:
- A $3.5 billion, six-year loan;
- New debt securities valued at $2.5 billion; and
- A $1.5 billion line of credit.
Marchionne’s management team has spent the last several months trying to line up the alternative funding. The move has several potential advantages. For one thing, it permits Fiat to significantly increase its stake in Chrysler.
But it also should reduce Chrysler’s interest rate. Marchionne has repeatedly complained about the amount the government has been charging, creating a bit of a stir, a few months back, when he used the potentially charged term, “shyster loans” to describe the government financing. He later apologized for the remark.
Ultimately, the move propels Chrysler forward to the point where it will eliminate all government oversight of its operations. General Motors officials are aiming to make a similar move, which could help eliminate the phrase, “Government Motors,” from critics’ vocabulary. GM, which emerged from Chapter 11 protection in July 2009, a month after Chrysler, has already paid off its bailout loans. But the domestic auto giant must still sell off the remaining government stake. After last November’s GM IPO, taxpayers still hold about a third of GM’s equity.
In a speech to the Detroit Economic Club, last week, Treasury Secretary termed the federal auto bailouts a success — though he acknowledged some money will likely be lost on the deal – because it preserved the two automakers and saved thousands of jobs. (Click Here for more.)
For Fiat to gain the final 5% stake, it must help Chrysler launch a vehicle that will yield a minimum 40 mpg, something expected before year’s end.
Though CEO Marchionne has suggested he would like to stage a Chrysler stock offering during “the second half” of 2011, he has recently indicated that move might be postponed until 2012.
Such a delay could be due to the timing of the new 40 mpg Chrysler vehicle – or concerns that the stock market won’t adequately value Chrysler stock. Prices for auto shares have slipped, in recent months, reflecting factors including the sharp run-up in oil prices.