Could Chrysler go broke?
According to Business Week magazine, the answer is, if not “yes,” a definite “maybe.”
The occasion which has prompted BW’s speculation is the issuance by Moody’s and Standard & Poor of ratings for new Chrysler bonds. These are the first ratings since Chrysler was sold by Daimler-Benz to Cerebus and the first that have not included the financial strength of Daimler in evaluating the risk of default on Chrysler bond issues.
Though the rating given Chrysler by Standard & Poor - a B minus – is the same as that given General Motors and Ford and a “junk” level bond rating, S & P analyst Gregg Lemos-Stein told Business Week that even a moderate sales of automotive sales in the United States could drive Chrysler under. The company is almost completely reliant on the domestic market, where it gets 92% of its sales. GM and Ford, in contrast, have extensive European operations. Moreover, Chrysler’s product mix is heavy on large trucks and SUVs, the market segment thought most vulnerable if the overall automotive market drops.
Lemos-Stein said that if Chrysler were to be hit with a double whammy of declining overall sales and a larger decline in truck and SUV sales, it would be at risk of defaulting on debt by 2010.
A Chrysler spokesperson stated that the bond rating was anticipated, in light of the split from Daimler. Nonetheless, the gloom of the Standard & Poor analyst isn’t good news for Chrysler, which is currently in the process of raising $20 billion through issuing corporate bonds. The company stated, however, that no problem in placing those issues was expected, as the bonds are fully secured.