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DETROIT - DaimlerChrysler AG's US$7.4 billion ($9.3 billion) deal to spin off Chrysler hit a speed bump yesterday when bankers were forced to postpone a US$12 billion syndicated loan to finance the transaction.
DaimlerChrysler and Cerberus Capital Management, Chrysler's intended buyer, both said they were confident the landmark buyout would close as planned in this quarter.
Market sources told Reuters Loan Pricing Corp. that underwriters remained committed to providing the needed financing for the deal, which marks the first time that a buyout firm has taken over a major US automaker.
The delay in the sale of the loan and higher rates for other Chrysler-related loans underscored a new skittishness in the debt market as lenders tighten access to cash. It also threatened to complicate pending asset sales that are part of the restructuring of the struggling US auto industry.
"People thought there was an unlimited till of funds that can just flow into the auto industry. The reality is it's a little bit more complex," said Argus Research analyst Kevin Tynan. "I don't think any deals don't get done because of what's going on in the markets ... It's just a bit of a wake-up call."
In addition to the pending Chrysler deal, Ford Motor Co. is shopping around its British luxury brands Jaguar and Land Rover and General Motors Corp. aims to complete a sale of its Allison Transmission unit.
Shares of GM and Ford both fell in response to news of the higher cost of closing the Chrysler deal. GM's shares declined 2.7 per cent to US$33.73, while Ford's stock dropped 3.5 per cent to US$7.97, both on the New York Stock Exchange.
The credit market has all but frozen in the face of a coming flood of bond and loan sales for leveraged buyouts and a mounting crisis in the subprime mortgage market.
Also on Wednesday, Alliance Boots postponed syndication of US$10.4 billion of senior debt for its leveraged buyout, while Oneida Ltd. scrapped a US$120 million loan, according to Reuters LPC.
"The situation is definitely worsening," said Meredith Coffey, director of analysis at Reuters LPC. "This is the biggest shift in the market in the shortest period of time I've seen."
Sources of loan demand, such as hedge funds and collateralized loan obligations, have pulled out of the market, while the pipeline of leveraged loans has grown to US$252 billion, up from US$62 billion a year ago, she said.
DaimlerChrysler Chief Executive Dieter Zetsche told a conference call on Wednesday that the sale of Chrysler to Cerberus remained on track.
"As I said before, we are completely within the anticipated time schedule for the closing. We therefore expect that the closing of this transaction will take place in (the third quarter of) 2007 as we indicated all the time," he said.
Zetsche had faced intense pressure from shareholders to unwind the nine-year-old merger between Daimler and Chrysler, especially after the US unit lost US$1.4 billion last year and allowed vehicle inventories to balloon.
DaimlerChrysler shares ended 1.8 per cent higher in Europe and its New York-listed shares rose 4 per cent to close at US$93.02 on the NYSE.
Cerberus Capital spokesman Peter Duda said, "Nothing has changed in terms of the deal closing."
Cerberus is acquiring 80.1 per cent of Chrysler from Daimler, which will own the rest of the automaker after the deal closes.
Chrysler Group Chief Executive Tom Lasorda, who will lead the fourth-largest automaker in the US market, said last week that the transaction was "very, very close" to closing and bankers were committed to providing the needed funding.
Auburn Hills, Michigan-based Chrysler has been preparing for a sale to close as soon as early August with plans for a party at its dealerships to mark the automaker's return to US ownership.
The Chrysler loan financing was launched by JP Morgan on June 28, with Bear Stearns, Goldman Sachs, Citigroup and Morgan Stanley serving as co-arrangers. The underwriters will now have to hold most of the pulled loan deal on their books until market conditions improve, while Cerberus and DaimlerChrysler will hold about US$2 billion, sources told Reuters LPC.
Chrysler's new owners also will pay higher interest rates on about US$6 billion of loans that are still being sold. Rates on those loans were raised by about 100 basis points, or 1 per cent, on Wednesday. That part of the financing is set to close on August 3, according to documents obtained by Reuters.
The higher funding costs are the second setback for Cerberus since agreeing to take over Chrysler in May. Cerberus Chairman John Snow said earlier this month that the fund had not expected to face the kind of tougher fuel economy standards recently passed by the US Senate.
Sources have told Reuters that Cerberus will undertake a sweeping review of future rear-wheel drive vehicles as it takes over Chrysler in a bid to improve the fuel economy of the automaker's line-up.
On Tuesday, a loan sale to pay for the buyout of GM's Allison Transmission unit was postponed, prompting wider yield spreads for high-yield or junk bonds. GM had agreed in June to sell its Allison unit for US$5.6 billion to private equity firms Carlyle Group and Onex Corp. The deal was being financed by US$3.5 billion in corporate loans and US$1.1 billion in junk bonds.
Bankers should be able to sell the loans eventually, but the market is so volatile now that loan investors are sidelined, said Vanessa Spiro, a New York-based banking and finance attorney with Jones Day.
"These are good assets, the underlying companies are performing well," she said. "That's why I think this is a lull rather than a crisis of confidence."
- REUTERS
