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Friday, December 21, 2007

Chrysler: Serious Financial Crunch

by Calculated Risk on 12/21/2007 09:33:00 AM

From the WSJ: Chrysler Faces Financial Pinch, Sees Asset Sales

Chrysler LLC has slipped into a serious financial crunch just four months after Cerberus Capital Management LP swept in to save the auto maker.

At a meeting earlier this month, Chief Executive Robert Nardelli told employees the company is headed for a substantial loss this year and is scrambling to sell assets to raise cash ...

"Someone asked me, 'Are we bankrupt?'" Mr. Nardelli said at the meeting. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with."
Back in August, when the sale of Chrysler to Cerberus was closed, the investment banks were unable to sell $10 billion in debt and had to take the debt on their balance sheets. This played a role in the credit crunch in early August.

The banks, led by JPMorgan Chase, and including Goldman Sachs Group, Bear Stearns, Morgan Stanley and Citigroup, have tried several times to sell some of these loans, and each time the offering has been postponed. In November, the banks tried to sell a portion of the debt at 97 cents on the dollar and found no takers. With the news that Chrysler's financial situation is "serious", the value of these loans has probably dropped sharply.

This is reminiscent of the Burning Bed incident mentioned in the WSJ in May:
In a famous event dubbed the "Burning Bed," First Boston Corp. in 1989 made a $457 million bridge loan to the purchasers of Ohio Mattress. When the junk-bond market collapsed soon afterward, First Boston couldn't refinance the loan and ended up owning most of Ohio Mattress. Credit Suisse had to inject additional capital into First Boston, culminating in a full takeover.
Even adjusted for inflation, $457 Million is chump change compared to the Chrysler pier loans.

Note: a bridge loan is supposed to be temporary financing while the banks syndicate the debt. When the debt can't be sold, the bridge loan becomes a "pier loan" - a bridge to nowhere - and ties up the capital of the investment banks.