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Daimler wants to get rid of Chrysler so badly that it is willing to give investors money to take it off its hands.
That's the gist of a news report Wednesday that investors had balked at lending $12 billion necessary to finance the sale of the Chrysler unit. Instead, the seller, DaimlerChrysler (DCX, news, msgs), and the buyer, private-equity firm Cerberus Capital Management, will have to provide part of the cash to complete the deal.
Bankers, including Goldman Sachs (GS, news, msgs), JPMorgan Chase (JPM, news, msgs), Citigroup (C, news, msgs), Bear Stearns (BSC, news, msgs) and Morgan Stanley (MS, news, msgs), will put up $10 billion. Cerberus and Daimler (which will be the name of the company once Chrysler is gone) will put up $2 billion. Getting rid of Chrysler will ultimately cost about $20 billion; the balance is the price tag for Chrysler Credit, the auto company's finance arm. Efforts to sell that business are going well, news reports say.
The complications are the latest sign of a worldwide credit crunch. Also known as a liquidity crunch or a credit squeeze, the phenomenon is simple: Deals are being held up because lenders have suddenly become more stingy.
"There is kind of a little freeze in the marketplace," Jamie Dimon, JPMorgan's CEO, said during a conference call with investors last week.
In practical terms, a credit crunch means this: You bought a stock because you were sure the company was about to be bought? Now you may have to wait for the payoff.
That's a reason the stock market has been rocky recently.
The Chrysler news initially helped knock the Dow Jones Industrial Average ($INDU) down about 60 points. It later rallied to a gain of 68 points to 13,785. The Dow lost more than 226 points Tuesday.
Daimler announced May 14 that it was selling 80% of Chrysler to Cerberus. The $7.4 billion deal included plans to raise more capital, perhaps as much as $60 billion, to get Chrysler back into shape. The debt is also needed to pay off Daimler, which has guaranteed Chrysler’s existing debt of $38 billion.
What makes the deal odd is Daimler's current position, which is like a home seller having to pay a buyer to take a house off his hands.
Lenders are charging more for financing because they're worried that problems related to shaky subprime mortgages in the U.S. may be only the first sign of a bigger problem. Lenders are starting to have second thoughts about the flood of cash chasing risky deals around the world. Deals are stumbling because borrowers don't want to pay more for loans.
There are multiple signs of the problem:
- General Motors' (GM, news, msgs) deal to sell its Allison Transmission business to the Carlyle Group and Onex Group of Canada for $5.6 billion was put on hold Monday. The banks and the buyers couldn't agree on the credit terms for $3.1 billion in loans to finance the purchase.
- Expedia.com (EXPE, news, msgs), an online travel site, wanted to borrow millions to buy in 117 million shares of its common stock. That buyback was chopped to 25 million shares because the company couldn't get the financial terms it wanted. Since peaking this year at $29.64 on July 13, the stock has fallen 13%.
- Kohlberg Kravis Roberts & Co., which invented the idea of the leveraged buyout in the late 1970s, is arguing with banks over the terms of debt needed to finance deals. KKR has upward -- and we're not making this up -- $121 billion in buyouts in process, including the $32 buyout of Texas utility TXU Corp. (TXU, news, msgs) and a $29 billion deal to buy First Data (FDC, news, msgs) Last week, KKR pulled a proposed $18.5-billion debt offering to finance the purchase of Alliance Boots, a health-and-beauty chain in the United Kingdom. Late Wednesday, banks decided to hold on to the debt from the deal until credit conditions improve, The Wall Street Journal said.
The death of the 'covenant-lite' deal
What do investors want? Higher rates and stiffer covenants governing what a company can or can't do with the money. In the last year or so, buyout firms have been able to sell lots of so-called covenant-lite bonds -- bonds with virtually no conditions attached.But now that investors are cooling to those deal terms, investment banks have to lend the money themselves, in what are called bridge loans, to make deals happen.
Investment banks don't like being in that position because they are hired to find money, not to lend it. Lending money ties up capital that could be used for other deals. And that means other deals have to wait.
But they are doing it. JPMorgan's Dimon told analysts last week that banks have committed to take $100 billion on bonds on deals and to make $200 billion in bridge loans so deals can close.
The root of the crunch isn't corporate deals. Instead, it's a result of the subprime mortgage mess. Banks gathered huge pools of mortgages, then sold securities backed by the loans that reflected the risk tolerance of various investors.
With many homeowners defaulting on their mortgages, big investors are worried they'll never see their money again. They want more before financing anything that smacks of high risk: The yield on a typical midgrade bond has jumped from 6.9% to 8.6% in a month, according to the Telegraph newspaper in London.
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