Cerberus to Give Up Chrysler Auto Equity for Loans
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.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. “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.
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