It seems that the private equity firm Cerberus, which bought Chrysler from Daimler-Benz and installed new management to turn around the automaker’s finances, is itself in financial trouble. Or, at least, it’s not all roses for the finance speculators.
 
First, it seems that the first wave of Chrysler bond sales by Cerberus’s bankers has completely and utterly failed.
 
When the Cerberus deal to purchase Chrysler closed, the investment bankers financing the deal had to swallow $12 billion in Chrysler bonds that they were unable to sell. Investment bankers make money on these deals by committing the money to buy the bonds, with the expectation that they will resell them to investors at a profit. But, the bankers were able to unload only about half of the debt used to finance the purchase. The rest they had to keep, in the hope that they’d be able to retail it later.
 
Later came last week. The bankers offered $4 billion of the $12 billion they’re currently holding.
 
They sold $0. 
 
Offers: zero.
 
As a consequence, the formal offer for sale of the bonds has been postponed.
 
This offering was downsized from an earlier offering this past August of $10 billion in bond, which also failed.
 
This isn’t directly bad news for Cerberus. It’s bad news for their bankers. 
 
But the news for Cerberus hasn’t been good, either. 
 
United Rentals has filed a $7 billion lawsuit against Cerberus. Cerberus had agreed to acquire the company for that price. But, when government filings required to consummate the deal disclosed that Cerberus has bid substantially more than the next highest bidder, Cerberus tried to renegotiate the deal. When United Rentals refused to change the terms, Cerberus backed out.
 
Whether Cerberus backed out because they discovered that they’d overpaid or because they were no longer able to come up with the money isn’t clear. But, United Rentals expects their money.
 
Meantime, GMAC, which Cerberus acquired from General Motors last year, is getting hammered as a consequence of the decline in the residential mortgate market. It’s subprime mortgage unit is in danger of bankruptcy and will likely need an influsion of capital. General Motors has stated publicly that the obligation of GM to contribute more money to GMAC is over. That means that Cerberus will have to come up with the cash itself, all of it. 
 
This past August, another Cerberus venture – Aegis Mortgage Corp. – did go bankrupt. Cerberus is also commited to buying the mortage unit of H & R Block, but may not be able – or willing – to go through with that deal.
 
Moreover, the cash situation at Chrysler appears to be getting severe. Forbes magazine is reporting that Chrysler is likely to tap the $1.05 billion line of credit which Daimler agreed to provide as part of the sale deal. 
 
What the news suggests is that the solons of Cerberus made a lot of wrong moves. GM got out of GMAC just in time, just before the subprime mortage market collapse substantially hurt that entity. Daimler sold Chrysler just before the speculative capital market collapsed as a consequence of the collapse in the subprime mortgage market. And Cerberus’s investments in that market have soured, one of them to the extent of taking the venture into bankruptcy.
 
That Chrysler is looking to get hold of the billion dollars that Daimler promised to lend suggests that they are trying to grab onto as much cash as they can, as soon as they can. Most of the moves they’ve publicized in the past two months have been aimed at cost cutting and some of them may have been designed to make it possible for the bankers, who cannot be happy, to sell the remaining inventory of Chrysler bonds.
 
But, those who figured Cerberus had some clever plan in mind to bring Chrysler back to the black should now have a bit more insight into what likely was the basis of the Chrysler deal all along:
 
Arrogance.
 
In the end, this cannot be comforting to Chrysler. Cerberus’ business was leveraging debt – using debt to buy assets which they would later resell at a profit. Without access to debt and with the value of the assets dropping, the enterprise is clearly going to be financially stretched. In the last analysis, Chrysler is one of their largest assets.
 
There are companies who are interested in the automotive industry, and do not need to resort to the equity market to get money for financing. Recently, a substantial stake in Canadian parts maker Magna was sold to a Russian figure with ties to Vladimir Putin and some of the more disreputable elements of Russian society. Also, Indian automakers have been seeking to expand their reach. Cerberus may yet find itself in need of a partner, at least, to keep the Chrysler investment whole.
 
Those retirees at Chrysler may end up being very happy that their medical benefits will be guaranteed through a UAW run VEBA, and not by Chrysler.

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