Chrysler Gets Junk Credit Ratings From Moody's, S&P

Chrysler, which is being bought by Cerberus Capital Management LP, received speculative-grade credit ratings from both Moody's Investors Service and Standard & Poor's for its automotive division and finance unit.

Moody's rates the Chrysler automotive division at B3, six levels below investment grade, and the financial services unit was ranked two levels higher at B1. S&P ranks both units at B, or five levels less than investment grade. The ratings match those at the vehicle units of rival U.S. automakers General Motors Corp. and Ford Motor Co.

New York-based Cerberus is seeking $20 billion of loans to take over operations of the DaimlerChrysler AG unit as interest margins paid by borrowers increase and market conditions weaken. U.S. high-yield loans were bid on June 28 at a four-year low in secondary-market trading, according to data compiled by S&P.

``Aside from high health-care costs and restrictive union work rules, Chrysler also must cope with declining market share,'' Moody's said today in a statement. Chrysler's ``negative free cash flow will be sustained for the near term.''

Cuts at Chrysler

Chrysler, which slipped to fourth place in the U.S. market last year behind Toyota Motor Corp., is in the process of closing a Delaware factory and cutting 13,000 jobs to return to profit by 2008. S&P said today in a statement that it expects Chrysler to ``remain unprofitable until into 2009.''

DaimlerChrysler in May announced the sale of Chrysler to Cerberus, which will invest $7.4 billion as part of the transaction. Under the agreement, Cerberus will buy 80.1 percent of Chrysler. Stuttgart, Germany-based Daimler will hold the remaining 19.9 percent.

The Chrysler deal is the largest automotive transaction in the U.S. loan market since Ford, the second-biggest U.S. automaker, received an $11.5 billion revolving credit and a $7 billion term loan. Ford pays Libor plus 3 percentage points on the term loan that it received last December.

U.S. companies rated four or five levels below investment grade pay an average interest margin, or spread, of 2.43 percentage points on loans, according to S&P's Leveraged Commentary & Data unit. That's up from the record low of 2.12 percentage points in February.

Buyout Financing

The automotive division of Auburn Hills, Michigan-based Chrysler wants $12 billion of high-yield loans and the finance unit wants $8 billion. Banks led by JPMorgan Chase & Co. held meetings with potential lenders on June 28 to sell the loans, according to investors who may buy the debt.

DaimlerChrysler's 8.5 percent note due January 2031 increased 0.39 cent to 126.25 cents on the dollar, yielding 6.34 percent. The automaker's U.S. shares rose $1.27 to $93.22 at 4:18 p.m. in New York Stock Exchange composite trading. The shares have risen 33 percent since the Feb. 14 announcement that the unit might be sold.

The automotive unit is seeking a $10 billion term loan paying interest at 3.25 percentage points over the London interbank offered rate, and a $2 billion second-lien loan paying interest at Libor plus 6 percentage points, according to the investors, who declined to be identified because the terms aren't public.

The finance unit wants a $4 billion term loan, a $2 billion revolving credit and a $2 billion second-lien loan. The second- lien loan will rank behind the $4 billion term loan and revolving credit for repayment in the event of a bankruptcy.

Three-month Libor, used as a borrowing benchmark in the loan market, is currently 5.36 percent. In a revolving credit facility, money can be borrowed again once it's repaid; in a term loan, it can't.

In a leveraged buyout, the buyer borrows most of the purchase price and uses the target company's cash flow to repay lenders.