Chrysler may up bond offering as loan demand falls

By @ibtimes on

NEW YORK, May 16 (RLPC) - Lingering doubts over Chrysler Group LLC's financial outlook along with the wider availability of bank debt could make it more costly for the U.S. automaker to refinance more than $7 billion government debt from its 2009 bailout.

Initially, Chrysler was seeking to borrow $3.5 billion through a term loan and $2.5 billion in bonds. This debt, along with $1.27 billion cash from Fiat SpA , would be used to repay loans owed to the United States and Canada.

But the smallest U.S. automaker may opt to borrow only $3 billion through a term loan and may increase its bond offering to raise the remaining $500 million, people familiar with the matter said on Monday.

Additionally, Chrysler is expected to pay investors a higher interest rate than it initially proposed on its term loan, as potential lenders demand more protection citing the perceived risk, these people said.

CEO Sergio Marchionne and Chief Financial Officer Richard Palmer are on the final leg of a road show to court investors, one source said. The road show began on May 4 in New York.

The company is currently sounding out potential investors on the loan at an increased pricing of 450-500 basis points over Libor. The loan is likely to maintain a 1.25 percent Libor floor and a 99-99.5 OID, according to sources.

Changes could also be made to the 101 soft call provision. This provision means the issuer would have to pay a premium if it decides to refinance the loan before it matures.

All in, the term loan is now expected to pay investors roughly 6.25 percent to 6.5 percent -- up from the earlier 5.5 percent to 5.75 percent range -- while the bonds are expected to yield around 8 percent, investors said.

Questions over the company's financial outlook and the large size of the term loan has diminished investors' appetite for the loan, market participants said.

An increase in new leveraged loans that launched for syndication in recent days has made more bank loan deals available to investors, investors said.

Chrysler, which burned many lenders in its U.S.-funded bankruptcy two years ago, must also overcome a checkered history, investors said.

In a market like this, trading sideways and with so much supply, people can afford to be choosy, especially when it comes down to a name where you have lost money before, an investor said.

Chrysler declined to comment. The sources spoke on the condition of anonymity because the talks are private.

SOUNDING OUT INVESTORS

Chrysler currently pays between roughly 7 percent and 20 percent on its U.S. and Canadian loans. Marchionne said he expects significant savings after the refinancing.

Chrysler is counting on the refinancing deal to put the company on firmer financial footing nearly two years after it went through a U.S.-funded bankruptcy.

Marchionne and Palmer visited potential lenders in Los Angeles Monday and will be in San Francisco Tuesday, one source said. They will finish the road show in Chicago on May 18.

Morgan Stanley is leading the $3.5 billion term loan that launched on May 4 at 400-425 basis points over Libor with a 1.25 percent Libor floor, along with a discount of 99 to 99.5 cents on the dollar. It included 101 soft call in year one.

Other top lenders on the loan are Bank of America Merrill Lynch, Citigroup and Goldman Sachs.

However, during the syndication process on the loan it became clear that to attract investors, the company would have to increase the relative value of the loan compared to the bond, sources close to the transaction said. Bank of America Merrill Lynch is leading the bond.

Market participants said the strength in the bond market would be a main factor driving changes in the loan structure.

Last Thursday, Jaguar Land Rover priced a 1 billion GBP-equivalent 3-part bond deal that was significantly oversubscribed. Another 20 high yield deals priced last week, the third busiest of the year to date, to raise $10.4 billion in proceeds.

Including Chrysler, there are another 17 deals in the pipeline this week totaling about $11 billion as issuers look to take advantage of record-low yields.

High yield volume for the first two weeks of May stands at $19 billion, which is a faster pace than the all-time record of $34.4 billion set in March 2010, according to Reuters data.

(Reporting by Reuters Loan Pricing Corp reporters Leela Parker and Michelle Sierra; additional reporting by Deepa Seetharaman in Detroit; Editing by Gary Hill)

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