Bankruptcy

Feds Bail Out Chrysler Financial

$1.5 billion is aimed at giving the company breathing room to make more new car loans.
Stephen TaubJanuary 16, 2009

Chrysler Financial has been granted the right to borrow up to $1.5 billion from the Treasury Department’s Troubled Asset Relief Program.

The TARP loan will be made to a special-purpose entity created by Chrysler Financial to finance the extension of new consumer loans. The move is part of a broader program designed to help the domestic auto industry regain viability.

“This funding will better position us to withstand the current economic challenges until funding becomes available through more traditional commercial sources,” said Chrysler Financial CEO and vice chairman Thomas Gilman.

The five-year loan will pay interest at a rate of one-month LIBOR plus 100 basis points for the first year and one-month LIBOR plus 150 basis points for years two to five.

Treasury’s loan will be secured by a senior secured interest in a pool of new consumer auto loans, and Chrysler Holding will serve as a guarantor for certain covenants of Chrysler Financial.

Under the agreement, Chrysler Financial must be in compliance with the executive compensation and corporate governance requirements of the Emergency Economic Stabilization Act, as well as enhanced restrictions on executive compensation.

The special-purpose entity created by Chrysler Financial will issue warrants to Treasury in the form of additional notes in an amount equal to 5 percent of the total size of the loan. The additional notes will vest 20 percent on the closing date and 20 percent on each anniversary of the closing date, and will have other terms similar to the loan.

Chrysler LLC, meanwhile, is negotiating to sell assets to Renault-Nissan and Canadian parts supplier Magna, Reuters reports. The automaker is under heavy pressure to restructure after accepting its own $4 billion loan from the U.S. government.

According to the Reuters report, Renault-Nissan may bid for Chrysler’s Jeep brand among other assets. Chrysler also plans to sell an assembly plant in Illinois to Magna in exchange for long-term production contracts.

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