Poetic justice as Chrysler tries to refinance
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
What goes around, comes around. Two years ago, the U.S. government bullied loan investors into accepting the steep losses involved in Chrysler’s bankruptcy plan. Now, they have the upper hand as the automaker seeks fresh borrowing of $6 billion to pay back the Treasury. The creditors are pressing their advantage.
Hot debt markets mean there’s little doubt that Chrysler will be able to raise the money. But the automaker may have to pay more than the 5.25 percent to 5.75 percent loan interest rate that it originally hoped for, and raise more of the total than it wanted from the pricier unsecured debt market.
Though memories are short in finance, it’s almost as if secured loan investors are dispensing some poetic justice. Back in 2009, the U.S. government strong-armed them into writing down more than two-thirds of an investment that they thought had been secured by hard assets. Not only that, but creditors with far weaker claims like the auto workers union and Fiat, which still hasn’t sunk a penny into Chrysler, looked to be getting a better deal.
To be fair, the U.S. auto industry’s weakling has returned to profitability since its turn through bankruptcy. Yet potential buyers of its debt know they have negotiating leverage. Chrysler’s new bosses are anxious to put the government bailout behind them once and for all. The Treasury, meanwhile, would like nothing more than to disentangle itself from the private sector. And Fiat wants a bigger stake in the U.S. group. Before Fiat can increase its share to 46 percent from 30 percent, Chrysler needs to pay back the U.S. and Canadian governments.
That gives the advantage to investors — a relatively rare occurrence in today’s turbo-charged financial markets. Still, if any of them are harboring thoughts of payback, they shouldn’t overdo it. Decent regular interest payments still trump grudges, especially when safe havens like Treasuries return so little. Moreover the unsecured bond market, where Chrysler had already planned to raise $2.5 billion, could probably handle more.
So there’s only limited scope for a well-chilled dish of creditors’ revenge. But even forcing Chrysler to pay a slightly higher interest rate may offer a little satisfaction.