All Eyes on Chrysler Debt Deal - TheStreet

All Eyes on Chrysler Debt Deal

Some say the deal could bolster beleaguered credit markets.
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Investors are crossing their fingers as the big Chrysler debt sale creeps ahead.

The struggling automaker and its

private-equity sponsor hope to raise $20 billion in the coming week. What it takes to get the deal done could say a lot about what will happen next in the auto industry -- and in the stock market.

The Chrysler deal is a "litmus test in terms of future deals," says Art Hogan, chief market analyst at Jefferies. He says deal terms will guide what multiples private-equity sponsors will pay for companies going forward.

Sources in the market say investors are chafing over a $12 billion issue tied directly to the auto company -- rather than to its financing arm. Investors say the underwriters have increased Chrysler's interest costs on all portions of the loans by about 0.5% to 0.75% since the roadshow began a few weeks ago.

The stock market has relied on an underlying M&A bid as a safety net, considering the huge war chests private-equity firms have amassed. If the multiples get smaller as financing costs get higher, that underlying bid becomes a weaker floor for stocks.

The deal also has big implications for Detroit's Big Three --

GM

(GM) - Get Report

,

Ford

(F) - Get Report

and Chrysler, a unit of Germany's

DaimlerChrysler

(DCX)

.

"The ability of the Big Three to fund certain types of deals will require a supportive credit market that is starting to get ugly," CreditSights auto analyst Glenn Reynolds writes. He points to this summer's labor talks as a key issue hanging over the stocks and notes that "this is the first time all three come to the table in fairly moribund financial shape."

Chrysler's loan sale has met with skepticism as other debt offerings have been shelved, as the markets for junk bonds and leveraged loans have dried up. But Cerberus and Chrysler have persisted.

Market participants familiar with the offering say the parties involved want to complete the deal as soon as possible. So, the stakes are high for Cerberus, DaimlerChrysler, the investment banks underwriting the offerings, and the markets.

If the deal were to be postponed or scrapped, a huge, highly risky chunk of the unwieldy new offerings calendar would disappear -- possibly leaving room for the correction in the secondary market to stabilize and allow for some of the smaller LBO financing come to the market, says Brian Hessel, managing partner at Stonegate Capital.

But he adds that if the deal does go through at terms that reward investors more for their risk, he'd expect the credit markets to rally, as the deal would set a new paradigm for risk and reward in the market.

The junk bond and loan investors who have fed the buyout boom of the past two years have begun to demand more reward and more protection for the risk they're taking to finance the over $200 billion of deals announced. The realignment of risk stems in part from the subprime mortgage meltdown as collateralized debt obligation managers and hedge funds unwind not only subprime investments but also sell junk bonds and loans to meet higher collateral requirements or redemptions from investors.

Another setback was Tuesday's news that the $3.1 billion of loans to finance the buyout of GM's Allison Transmission were shelved.

Stock market investors are also watching the deal to help sort out the impact for the investment banking sector, which has suffered this year. While many of the investment banking firms have posted decent earnings recently, nearly all of them acknowledged that revenues may be stunted by loans and bridge loans tied to leveraged buyouts that get stuck on their balance sheets.

JPMorgan

(JPM) - Get Report

is the lead arranger of the loans, but

Goldman Sachs

(GS) - Get Report

,

Citigroup

(C) - Get Report

, Bear Stearns and

Morgan Stanley

(MS) - Get Report

are also underwriting the Chrysler debt offerings. Cerberus will need to raise a total of $62 billion in order to complete the deal.

Chrysler Group Chief Executive Tom LaSorda said last week that the deal to finance the buyout was "very, very" close to completion. He added that "commitments are there from the banks."

Bank investors can decide for themselves whether that's good news or bad.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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