Chrysler Financial gets US$1.5B loan

WASHINGTON -- The U.S. Treasury said Friday it will lend Chrysler LLC’s finance arm US$1.5-billion to help it make new car loans as part of a broader aid program to revive the sputtering domestic auto industry.

Chrysler Financial, the finance arm of the No. 3 U.S. automaker, responded by immediately rolling out a 0% financing offer on a range of Chrysler vehicles.

In a related development, a U.S. government official said the Treasury had been in discussions with Ford Motor Co and its credit arm regarding their financing needs since December.

Ford has asked for a US$9-billion line of credit from the U.S. government if the economy significantly weakens. The Treasury has already agreed to loan up to US$17.4- billion to GM and Chrysler’s auto operations.

The government officials said he could not characterize Ford’s latest intentions regarding government aid.

The Treasury said it will make the loan from its US$700-billion financial bailout fund to a special unit created by Chrysler Financial at an interest rate one percentage point above the London interbank offered rate (LIBOR) for the first year. This will then rise to 1.5 percentage points above LIBOR.

Chrysler Financial will get an initial US$100-million payment on Friday, the government official said.

The loan will be secured by new auto loans that Chrysler Financial originates, and the special unit structure aims to protect taxpayers in the event that the company files for bankruptcy, the government official said.

The Treasury earlier extended a US$4-billion loan to Chrysler for its automotive operations and had granted US$13.4-billion in operating loans to General Motors Corp.

Treasury last month invested US$6-billion to support activities of GMAC, the financing arm affiliated with GM.

The government is bolstering the finance companies to spur auto loans to consumers, whose purchasing power has been slowed due to the credit crunch and recession. Most U.S. car buyers finance their auto purchases.

Chrysler Financial, which is owned by private equity firm Cerberus Capital Management, said it would use the government funding to make more loans through Chrysler dealers for vehicle purchases.

"This funding will better position us to withstand the current economic challenges until funding becomes available through more traditional commercial sources," Chrysler Financial Chief Executive Thomas Gilman said in a statement.

Automakers have blamed tight credit as a major factor behind the 18% drop in industry-wide U.S. auto sales in 2008. Analysts expect the downturn to continue this year, driving sales of new cars and trucks to their lowest level since the early 1980s.

New vehicle sales represent some 20% of U.S. retail sales and are tracked as an early indicator of the strength of consumer demand.

By extending the US$1.5-billion loan to Chrysler Financial, the Treasury has now bailed out three firms controlled by Cerberus, including Chrysler and GMAC. Cerberus has an 80% stake in Chrysler and a 51% stake in GMAC.

Chrysler is considered the weakest of the Detroit manufacturers and analysts have questioned whether it can survive without a merger partner.

Chrysler burned through US$9-billion in the second half of last year to end 2008 with US$2-billion cash.

Chrysler’s sales fell 30% in 2008 and it shut down all its manufacturing facilities for a month at the start of this year to shore up cash and cut inventories of unsold vehicles.

Peter Morici, an economist with the University of Maryland, said the Treasury decision to support Chrysler Financial was expected after the move by government officials to recapitalize GMAC.

"If we’re going to get the automakers on their feet, we’ve go to help their finance firms," he said.

© Thomson Reuters 2009