Cerberus Capital Management LP’s sale of Chrysler Financial Corp. values the lender at least 33 percent more than when the U.S. Treasury Department sold its holding to the buyout firm seven months ago.
In a deal that valued the auto lender at $4.75 billion, the Treasury got $1.9 billion from Cerberus in May to pay off Chrysler Financial’s bailout debt. Yesterday’s purchase by Toronto-Dominion Bank values it at $6.3 billion. After the Treasury’s exit, Cerberus injected about $500 million into Chrysler Financial, and plans to keep about $900 million of the lender’s assets, people briefed on the deal said. Without those moves, the firm’s value would be 41 percent higher than in May.
The Treasury’s $700 billion Troubled Asset Relief Program is likely to suffer the “bulk” of its losses from aiding the auto industry, American International Group Inc. and homebuyers, the Congressional Oversight Panel said in a September report. The Treasury, which last week called TARP “one of the most effective crisis-response programs ever,” has said the main focus was to stabilize the financial system.
“We’re not a private-equity fund,” said Tim Massad, the Treasury’s acting assistant secretary for financial stability, about the agency’s management of TARP in an interview last month. “We believe that promoting financial stability means we should exit as soon as we can.”
Helped by GM
Cerberus, led by founder Stephen Feinberg, 50, may have benefitted from Detroit-based General Motors Co.’s (GM) agreement in July to buy auto-lender AmeriCredit Corp. for $3.5 billion. That deal valued Fort Worth, Texas-based AmeriCredit at 46 percent more than its book value of $2.4 billion.
“That’s our most recent auto finance comp, and that was a very expensive transaction for GM,” said Adam Steer, an analyst at research firm CreditSights Inc. in New York, in an interview Dec. 8. “That could potentially be impacting values.”
Toronto-Dominion’s $6.3 billion cash purchase of Chrysler Financial includes $5.9 billion in assets and about $400 million in goodwill, Canada’s second-biggest bank said yesterday in a statement.
The Treasury’s holding in Chrysler Financial stemmed from a $4 billion bailout loan to automaker Chrysler LLC’s parent, Chrysler Holding, in January 2009. The loan went into default when Chrysler LLC declared bankruptcy in April 2009. Two months later, the automaker’s best assets were bought out of bankruptcy by a new company run by Fiat SpA. (F)
More Than Expected
In an agreement with Cerberus, the government had the right to receive $1.375 billion from Chrysler Financial or 40 percent of any distributions the lender made to Cerberus -- whichever was greater.
The $1.9 billion repayment, “while less than face value, is significantly more than the Treasury expected to recover on this loan,” the agency said in May.
The Treasury made the deal because it had a willing buyer and wanted to exit the business, said a person familiar with direct knowledge of the transaction, who declined to be identified because the considerations aren’t public. The agency wants to resolve bailout holdings quickly rather than trying to time the market, the person said.
The government bailout of the car industry helped Chrysler Financial. A liquidation of the carmaker may have threatened warranties on vehicles, hurting the lender’s value.
Before resolving its debt to the Treasury, Chrysler Financial mostly collected payments and was restricted in issuing new loans, a business it has resumed. It is no longer related to Chrysler Group LLC based in Auburn Hills, Michigan.
U.S. equity values have climbed since May 17. The Standard & Poor’s 500 Index gained 10 percent through yesterday, and the 25-member Bloomberg World Auto Manufacturers Index advanced 32 percent.
Chrysler Financial earned $300 million in the third quarter, exceeding management’s $36 million forecast, Debtwire reported last month, citing two people familiar with the situation.
The jump in Chrysler Financial’s value wasn’t entirely caused by used-car prices, which increased 2.7 percent from May to November, according to the Manheim used-vehicle price index. Prices had soared 22 percent from January 2009, when Treasury first took a stake in Chrysler Financial.
‘More Value to Be Gained’
Franklin Templeton Investments, one of Cerberus’s outside investors in the buyout, said in U.S. regulatory documents that the value of its Chrysler Financial stake almost tripled during the first nine months of this year.
“Although initially it was an illiquid position, we recently began to see renewed investor interest in Chrysler Financial from a pricing perspective,” Franklin Mutual Recovery Fund said in a report to investors filed with the Securities and Exchange Commission on Nov. 29. “There is still more value to be gained going forward.”
To contact the reporters on this story: Jeffrey McCracken in New York at firstname.lastname@example.org; David Welch in Southfield, Michigan at email@example.com; Dakin Campbell in San Francisco at firstname.lastname@example.org