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Cerberus Forced to Sweeten Terms to Finance Chrysler Acquisition

Cerberus Capital Management has received a lukewarm reception from investors as the private-equity firm raises cash to finance its acquisition of Chrysler Group, people familiar with the deal said Tuesday.

The Wall Street investment banks in charge of selling some $62 billion of debt as part of the acquisition have had to reprice loans and sweeten terms in recent days, said two underwriters who spoke on the condition on anonymity because they were not authorized to speak publicly about the deal.

The banks are currently in the midst of selling some loans as part of the financing package. Much of the rest will be used to refinance existing Chrysler debt.

Underwriters have responded by increasing the rate of return on the loan, and are looking to sell additional loans at less than face value to entice investors. Reluctance by investors reflects a weakening in the market for debt financing, especially through risky junk bonds.

"The past couple of weeks shows that the best of times for private-equity firms are in the past," said Martin Fridson, a high-yield bond analyst who runs FridsonVision. "The terms on which they can raise money in the bond market or leveraged loan market are not as good as they were, and that's forced them to reprice the loans."

He said the Chrysler fundraising effort is being closely watched because of its size, and also because it is related to the troubled auto industry. Credit rating agencies like Standard & Poor's and Moody's Investors Service have been forced to downgrade large pools of debt to junk status because automakers have had a tough time turning a profit in recent years.

Investors are also worried that Chrysler will have to make large concessions during negotiations with the United Auto Workers union over health care and other benefits.

The buyout shop intends to buy Chrysler Group from DaimlerChrysler in a $7.4 billion transaction that should close sometime this quarter. The firm is also taking on billions in existing debt on top of the purchase price.

However, Cerberus Chairman John Snow has commented in the past that he expected investors to be somewhat hesitant to buying debt. But, he did not expect Cerberus would be prevented from raising the cash needed for the deal.

JPMorgan Chase & Co., Bear Stearns Cos., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley are leading the financing efforts. They did not immediately return telephone calls for comment.