Chrysler Group LLC, the U.S. automaker run by Fiat SpA, has contacted banks about borrowing money before a possible initial public offering next year, two people familiar with the effort said.
Chrysler owes the U.S. and Canadian governments $7.4 billion and Chief Executive Officer Sergio Marchionne has said interest on that debt has kept the automaker from earning a profit in the first half of this year. Fiat, which he also runs, can’t have a majority stake until Chrysler has repaid the money borrowed as part of last year’s bankruptcy and reorganization.
The third-largest U.S. automaker’s board is looking to refinance U.S. and Canadian government loans as it considers the proper debt level for the company, Marchionne said last week. The company approached banks about valuation and loans in recent months, said the people, who asked not to be identified because the discussions were private.
“What he wants to do clearly is refinance it and take advantage of the extraordinarily low level of interest rates,” Joseph Phillippi, principal of AutoTrends Inc., a consulting firm based in Short Hills, New Jersey, said in a telephone interview. “Getting the company’s financial footing in a much stronger position is clearly going to benefit him.”
Chrysler, based in Auburn Hills, Michigan, has said its effective interest on the money borrowed from the U.S. government is as high as 14 percent and as high as 20 percent on the Canadian loans.
General Motors Co. recently obtained a $5 billion revolving line of credit on which it will pay 4 percentage points more than the London interbank offered rate on the credit line, according to a person familiar with the transaction. Three-month Libor, the rate banks charge to lend to each other, has been less than 0.55 percent all year.
Directors are exploring sources of funding as well as timing of the IPO, Marchionne said last week. Trading could begin in the second half of next year, he has said. Marchionne is also spinning off Fiat’s industrial business.
Shawn Morgan, a Chrysler spokeswoman, declined to comment on the board’s deliberations.
“They might want to refinance just to make the balance sheet look better for the IPO,” said Logan Robinson, former general counsel for auto-parts maker Delphi Corp. and now a law professor at the University of Detroit Mercy.
Chrysler already topped its full-year earnings forecast in the first six months of the year, with an operating profit of $326 million. Its second-quarter net loss narrowed to $172 million from $197 million in the first three months of the year. Chrysler ended the second quarter with $7.84 billion in cash. It plans to report third-quarter results Nov. 8.
Chrysler needs to keep a minimum cash balance of about $3 billion for working capital, Moody’s Investors Service said in a November 2009 note.
Marchionne said last week during Fiat’s third-quarter financial results presentation that Chrysler needs “better clarity” about its capital structure, “including refinancing” the government positions.
“These are the things that are being examined by the board of directors at Chrysler,” Marchionne said last week.
The maneuvering comes as Marchionne works to increase Turin, Italy-based Fiat’s 20 percent ownership stake in the Auburn Hills, Michigan-based automaker to 35 percent through accomplishing three milestones set up as part of Chrysler’s reorganization deal with the U.S. and Canadian governments.
The company is talking with the U.S. Treasury to change Chrysler’s operating agreement related to the milestone involving sales outside of the U.S., Canada and Mexico, Marchionne said last week.
It calls for Chrysler to post cumulative revenue of $1.5 billion outside of North America and execute franchise agreements allowing at least 90 percent of Fiat’s Latin American dealers to sell Chrysler vehicles, according to the agreement.
Chrysler, which doesn’t report its international financial results, has reached the revenue goal, Monica Bosio, an industry analyst with Milan-based Banca IMI SpA, said in a note to investors.
While Fiat has “technically” met that requirement, regulations governing Fiat’s dealer network in Brazil make the obligation “fraught with difficulty,” Marchionne said. The issue should be resolved by the end of next year, he said.
Mark Paustenbach, a spokesman for the Treasury, declined to comment on the matter.
Chrysler has said it will begin producing a small Fiat-derived engine in November, another of the three milestones.
The final goal, assembling a car in the U.S. that gets 40 miles per gallon, also should happen next year, Marchionne said.
Chrysler is investing $600 million in its assembly plant in Belvidere, Illinois, it said Oct. 28. That’s where the Dodge small car based on Alfa Romeo’s Giulietta will be built, according to two people familiar with the plans.
Morgan, the Chrysler spokeswoman, declined to comment on which product will be built at the Belvidere plant.
While Fiat can’t obtain a majority stake until the governments have been paid in full, it’s allowed to purchase as much as an additional 16 percent of Chrysler after the principal amount of the government loans falls to less than $4 billion.
Marchionne said he can’t exercise the option to purchase additional shares in Chrysler until 2013 unless the agreement is amended and that discussions on a change “absolutely” could occur.
In September, Marchionne said Chrysler’s IPO may be “relatively small” and in “chunks” so the company can establish a base market for the stock. Chrysler’s financial performance next year will support an IPO in the second half, he said.
Chrysler hasn’t been an independent publicly traded company since 1998, when it merged with the former Daimler-Benz AG. The companies separated in 2007 with the sale of Chrysler to Cerberus Capital Management LP, a private equity firm.
Fiat gained control of Chrysler during its U.S. government-backed bankruptcy restructuring last year.