Cerberus to Give Up Chrysler Auto Equity for Loans (Update3)
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By Jason Kelly

Dec. 19 (Bloomberg) -- Cerberus Capital Management LP, the buyout firm that owns Chrysler LLC, plans to hand over equity in the company’s automotive operations to workers and creditors as part of its emergency loan lifeline from the U.S. government.

“Cerberus believes that concessions by all relevant constituencies will be required to facilitate a full restructuring and recapitalization of Chrysler,” the New York- based firm said in an e-mailed statement today. Cerberus bought 80.1 percent of Chrysler from Daimler AG in 2007 for $7.4 billion, its largest investment.

General Motors Corp. and Chrysler will get $13.4 billion in loans to keep operating in exchange for substantially restructuring their businesses under a rescue plan announced today by President George W. Bush. Cerberus said today the global economic crisis had a “swift, unexpected, unprecedented and catastrophic effect on the American economy” that it couldn’t have anticipated.

“What private equity is good at is adjusting the sails on the boat,” said Paul Schaye, managing director of New York- based Chestnut Hill Partners, which helps buyout firms find investments. “This is a situation where you had all the water drained from the ocean.”

Cerberus will transfer its ownership stake in Chrysler’s automotive business as part of the government agreement, which requires the car companies to reduce their debt by two-thirds and to cut expenses. Cerberus’s co-investors, who it has declined to name, will also give up their equity in the business. Cerberus declined to give a value for the ownership interests.

Chrysler Financial Stake

The investment in Auburn Hills, Michigan-based Chrysler accounts for about 7.5 percent of Cerberus’s $27 billion in assets under management, according to the statement.

Cerberus will retain its equity stake in Chrysler Financial, the automaker’s lending arm, and use profits or other money generated from that business to provide a $2 billion backstop to the government loan, according to the statement.

Cerberus said it doesn’t have the funds necessary to bail out Chrysler. The firm manages money for clients including pension funds and endowments and invests in a variety of companies. Its agreements with investors limit the amount of money the firm can commit to any one deal.

Not an ATM

“Cerberus is not a deposit-taking institution that can act as an ATM machine for its portfolio companies,” Cerberus said in the statement.

Chrysler has been battered by a 28 percent plunge in U.S. sales through November, the steepest drop among major automakers. It ended the third quarter with $6.1 billion in cash and needs at least $3 billion on hand to operate, Chief Executive Officer Robert Nardelli told Congress on Nov. 18.

The firm, run by former Drexel Burnham Lambert Inc. banker Stephen Feinberg, has other car troubles. GMAC LLC, the auto and home lender that Cerberus controls, is scrambling to line up more support for a $38 billion debt swap, part of a plan to remain viable by becoming a bank holding company.

 

So, as I read this, Cerberus is simply giving away Chrysler Automotive to Employees and suppliers and letting them worry about it??

Oddly enough, I think that's likely the best thing to do, and might actually give Chrysler a chance. Putting it in the hands of people whose life essentially depends on Chrysler turning around. That's what Chrysler has historically (at least since the 1970s) has been all about.

Daimler still owns 20%. Nissan has strong ties with Chrysler. Volkswagen's minivans are actually redesigned Chryslers. Chrysler also still has strong demand for their vehicles.

But that also confirms that Cerberus actually wanted Chrysler Financial, and got the automotive arm as a bonus.

It's ironic that the 2 automakers that have Cerberus owning their financial arm are the ones hurting the most because buyers can't get loans.

 

Sadly, I think it's too late for Chrysler to survive as a free-standing company. The recent cuts made by Chrysler, have I think, sealed it's fate.


My only hope for it right now is that another company (Nissan/Renault ???), can work a deal to scoop up some of it's remnants, so some parts of what we've known as "Chrysler" can carry on.

 

Wanna hear something strange? Chrysler dealers are cheering Chrysler shutting down for a month.

I guess this gives them a huge break in financing new stock or something.

I was kind of surprized to hear it seems it's actually a very good move.

Just hope they can restart.

 

Uh... Cerebrus just shed most of its responsibility and effectivly split Chrysler financial from Chrysler financial. Chrysler financial is tied to this loan. I fully believe in Cerebrus right to shed business it doesnt believe in but doesnt this mean Chrysler will be on its own without its finacial arm and probably the benefit of below market rates for considering less popular vehicles? Once this loan is repaid why wouldnt Cerebrus rename Chrysler financial to something else and shed Chrysler completely since it at least appears to me there would no longer be a reason or responsibility to favor Chrysler vehicles? Even if thats the case, completely within Cerebus right, but to me sounds like the death knell for Chrysler. Am I wrong on this? Doesnt really sound sustainable, or at least sounds like moving to a disadvantage.

In the short term I would think it keeps them from flooding the market and competing with themselves.

 

Honestly, unless someone buys Chrysler, they're done. If the feds call those loans after March and probably even if they don't - it'll be straight to Chapter 7 liquidation. Maybe VW buys the minivans, Nissan picks up Ram, someone else Jeep, and the tooling for the Sebring goes to Russia.

 

Chrysler dealers are happy because closing production means that, even though Chrysler doesn't have their "sales bank" of unsold cars anymore, they've still been shoving cars at us through sales promotions since November 1. It got old. FAST.

Shutting down allows time for dealers to work through inventory. I know it doesn't help Chrysler's search for revenue, but it should allow for a healthy return to ordering. Seeing as how Chrysler normally shuts down for 2 weeks, is this really that big of a deal?

Am I missing something here? With a fresh $4b and a supposed plan, why are they already out of business?

 

Jason, I hope that they're NOT done. But that $4B loan is essentially government financed Chapter 11, without having to use the term "bankruptcy" and is going straight to creditors. People are saying that last months' round of cuts, have gutted Chrysler's ability to develop products. Cerberus is ready to simply walk away, (after taking Chrysler Financial of course), and won't invest a nickel into Chrysler.

I hope that there is some scenario where Chrysler can move forward as a successful company - I just can't put the pieces of the puzzle together to see that outcome.

 

I think Chrysler just might be grossly underestimated. There's an awful lot of things that's not being considered.

First of all, Chrysler has more operating capital it needs than GM does.

Every estimate has GM going belly up at the start of January if it didn't recieve government help. As it turned uot, if GM hadn't recieved Federal loans, it would have started defaulting when bills came due December 31st. Meanwhile, Chrysler had enough capital to last through at least the first quarter of the year and likely into the 2nd half before it was at the point GM is today.

Secondly, Chrysler has partnerships that have the potential for huge payoffs. Nissan will keep the Ram's plant in Mexico running at good capacity. Nissan is also providing the architecture and the assembly line for the Hornet. The Altima or Maxima is slated to provide the platform for the next Chrysler midsize line (to be made here in NA). Daimler still owns 20%, and for reasons either good or bad, have been seemingly loathe to give up that portion. Volkswagen is even in the picture, having their mini vans made by Chrysler.

Also, keep in mind, Chrysler took some of the biggest sales hits in the industry over the past year, and still managed to simply adsorb them.

Third, Chrysler seems to breed a certain type of mentality in the people who lead it.

Chrysler's CEO, Mr Nardelli, although seemingly well out of his league, seems to have his heart unquestionably in the right place, and genuinely wants to see Chrysler succeed. You get a feeling the guy's in a position where he truely cares about the company, and wants to do anything he can but isn't getting the help he needs to clinch it. Much the same thing happened with Dieter Zetsche. Came to Chrysler, apparently to disembowel and bury it. But one could sense a change in him the longer he stayed there.

Chrysler seems to breed a scrapy "Us against Them" mentality that honed an edge and made famous people like Bob Lutz, Tom Gale, François Castaing, Lee Iacocoa, and Wolfgang Bernhard to name a handful. Chrysler has a history of ballsy moves (the early 90s Ram, the Viper, the Prowler, the cab forward cars, the Neon, the PT, the RWD LX) at times when you'd least expect it... even when events seem to dictate they can't (currently helped along by the Challenger).

With so much riding on the upcoming Hornet, and Ralph Gilles now running design since Trevor Creed moved out late last summer (Giles was mentored by Tom Gale). His first proclimation was that the Edge look is history, and that Chryslers would from then on look "sexy". So expect more 300 like starpower in designs (and perhaps Chrysler-of-the-90s-like head turning styling) and less Sebring/Crossfire/new minivan overly creased neo-art deco body styling.

I strongly believe if Chrysler gets any traction (with it's history of doing so much with so little for so long that it can do almost anything with next to nothing) it's going to be a money machine the moment the economy simply stablizes.

Ford's going to get all the press (and possibly the sales), but I think Chrysler is going to see the quickest financial turnaround if we hit the bottom and Chrysler is still around.