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Chrysler to repay government loans

New deal reduces interest payments

By Tom Krisher
Associated Press / May 19, 2011

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DETROIT — Chrysler is close to repaying its government bailouts.

The company has lined up investors to help it refinance $7.5 billion in loans from the US and Canadian governments, three people briefed on the matter said yesterday. Under the deal, the company would take out $2.5 billion in bank loans and sell $3.5 billion worth of bonds to investors. Italy’s Fiat, which has management control of Chrysler, would kick in $1.3 billion more to raise its stake in the US carmaker.

The deal moves Chrysler closer to separating itself from the government, which was the only lender available to save the company when it nearly ran out of cash early in 2009. Chrysler would like to shed its image as a ward of the government, which has angered some potential customers who disliked the bailout. The refinancing also will dramatically cut Chrysler’s interest payments, which CEO Sergio Marchionne has blamed for holding down the company’s profits.

Details of the financing package are still being worked out and are scheduled to be finalized this morning, the people said. It’s likely that the money will change hands and the government debt will be repaid on Tuesday, said two of the people, all of whom asked not to be identified because negotiations are ongoing.

Chrysler took $10.5 billion from the US government to survive two years ago, and it has repaid some of the money. The refinancing will allow Chrysler Group LLC to retire the remaining $5.9 billion balance on the loans, in addition to paying $1.6 billion to the governments of Canada and Ontario.

It also cuts the interest rate that Chrysler pays on the money to about 8 percent on the bonds and 6 percent on the bank loans from around 12 percent the governments charged per year, the people said. Interest rates will be finalized this morning, the people said. Marchionne has said the government interest rates are excessive.

Last year Chrysler paid $1.2 billion in interest on the loans, or over $3 million per day.

Even with the loan payments, Chrysler still owes the US government about $2 billion. Some of that could be recouped when the government sells its 8.6 percent ownership stake in Chrysler. Fiat has an option to buy the stake, or it could be sold in a Chrysler initial public stock offering that could come later this year or in 2012. Not all of the money will be recovered, though.