Chrysler Raises $5 Billion To Pay Off Debt

Fiat Chrysler Automobiles group announced today its Chrysler unit will pay $5 billion to a United Auto Workers healthcare trust, completing debt repayments from its bankruptcy in full almost a decade earlier than anticipated, the company said in a statement, according to Reuters.

Chrysler raised about $3 billion in bonds and secured $2 billion in new loans to pay off money owed to the VEBA trust.

“This transaction brings to a successful and earlier than anticipated conclusion the process that led the U.S. and Canadian governments, the UAW and the VEBA, together with Fiat, to take on the task of reestablishing Chrysler as a viable automotive enterprise,” Chrysler CEO Sergio Marchionne said in the statement.

“With the full early repayment of government loans in 2011, the acquisition from the VEBA of their Chrysler equity stake by Fiat in January of this year, and the full monetization of the VEBA note some nine years before the expiry of its term, Fiat and Chrysler together have satisfied all the monetary commitments that were made to Chrysler back in 2009,” he said.

Analyst Viewpoint

Matthew Stover, a director with Guggenheim Capital Markets, said this is all part of Chrysler’s healing process.

“I think the restructuring of Chrysler is really in the first half of the game,” he said.

Chrysler made amortized payments of roughly $300 million in 2010 and 2011, $400 million in 2012 and $600 million in 2013.

The conclusion of payments to the VEBA trust comes nine years sooner than initially planned. Chrysler was scheduled to make a payment each year on July 15 from 2010 to 2023, according to the company’s indenture agreement.

Kirk Ludtke, managing director of CRT Capital Group, said that both Fiat and VEBA trust were interested in getting the debt paid off early.

VEBA wanted to diversify its holdings, so it was keen on monetizing its stake. Fiat wanted access to the Chrysler cash holdings.

Stover said these kinds of indentures are set up to be paid off. This gives the company flexibility, he said, because nobody really knows how a recession will heal.

Another reason is that paying off debt early becomes a boost of confidence.

But Chrysler still has a lot of debt relative to its peers, Stover said.

“From a financial standpoint, their balance sheet is not as good as GM or Ford’s,” he said.

Background

Fiat bought the Chrysler investor VEBA last month in a $4.35 billion deal, giving control of the company to the Italian automaker.

Established in 2007, the VEBA trust was created so that Chrysler, General Motors and Ford to shift the responsibility of paying for UAW retiree health care.

The VEBA took stakes in GM and Chrysler in 2009 when the companies went through government-funded bankruptcy restructurings.