Chrysler Deal Set to Close but Investors Balk at Debt Pricing

Chrysler Group was busy on Tuesday planning a massive celebration to mark the automaker's imminent return to American-controlled hands, but the Wall Street banks put in charge of raising a $62 billion turnaround package faced increased scrutiny from debt-shy investors.

Cerberus Capital Management will in the coming days close its $7.4 billion acquisition of the automaker from DaimlerChrysler AG, ending nine years of ownership by the German company. And, at Chrysler's headquarters in Auburn Hills, Mich., the Daimler name is already being removed from buildings and wiped from corporate stationery.

But, what is still far from certain is investor appetite for the massive funding package used to refinance Chrysler debt and recapitalize the company. Investors have balked at the upcoming pricing of $12 billion of debt for the Chrysler deal, according to people familiar with the transaction who were not authorized to speak on the record.

That hesitance to buy into the sale, according to one of the world's most closely-watched debt investors, may be a signal that the woes in the home mortgage market have spread farther and wider than anyone believed.

"Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week," said Bill Gross, a bond fund manager for Pimco, in a note to clients Tuesday. "That more than anything may wake them, shake them, and tell them that their world has suddenly changed."

However, that doesn't mean Cerberus will not be able to raise the money or complete the deal. Depending on how their agreement is structured, the private-equity firm might end up having to pay higher interest rates than originally envisioned -- tacking on millions of dollars to the deal.

"Our financing is fully committed, and we are confident the deal will close on schedule," said Peter Duda, a spokesman for Cerberus, who would not discuss specific terms of the buyout shop's agreement with investment banks.

The deal also could be structured so that the investment banks underwriting the offering might be held responsible for paying the higher interest. In many cases, these banks hold on to the debt and sell it later when market conditions improve.

Leading the financing is JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley, Bear Stearns, Toronto-Dominion Bank and the Royal Bank of Canada. Spokesmen for all of those institutions either did not return telephone calls or would not comment on the debt sale.

Trouble selling the deal to institutional investors highlights the risk to private-equity firms that count on high-yield loans and bonds to put together deals.

It also underscores possible obstacles for both stocks and the wider economy as buyouts begin to slow. This has already been evident in the stock market's big rally this year, in which major U.S. banks and brokerages have lagged sharply behind.

For instance, on Tuesday investors jittery about the credit markets sent shares of financial stocks sharply lower -- and brought major market indexes along with them. This year, Goldman Sachs alone has underperformed the Dow Jones industrial average by 11.2% and the Standard & Poor's 500 index by 7.9%.

Pete Hastings, an auto industry corporate bonds analyst with Morgan Keegan, said he expects Cerberus to get the financing it needs, but not on the terms it would have received six months ago when liquidity was more abundant.

"I do think the deal eventually gets done. It'll cost them more," Hastings said.

Uncertainty about funding isn't stopping Chrysler, and its 80,000 employees, from preparing. Cerberus' bid to buy Chrysler is a stunning reversal of the takeover of the Jeep and Dodge maker by Daimler Benz AG in 1998. Although it was billed as a merger that would create a global automotive powerhouse, the corporate cultures clashed and the companies never fully integrated their operations.

Chrysler spokesman Jason Vines said he had a meeting Tuesday morning with Chief Executive Tom LaSorda to plan activities for the first day under Cerberus' ownership.

The company is planning a giant party at its headquarters complex that will celebrate the new Chrysler. No date has been set, but Vines said it would likely occur within the next two weeks.