April 11, 2008
Reuters reported yesterday an underwriter of a loan used to finance the Cerberus buyout of Chrysler Group from Daimer AG, sold off hundreds of millions of dollars of the debt at 61 cent on the dollar.
Approximately 80% of Chrysler was purchased by the private equity firm Cerberus Capital Management LP in August 2007 in a financed $7 billion deal. The deal was finalized just weeks before the start of the credit crunch and on the cusp of the economic downturn in the US. Since that time the banks have been trying unload the loans on the market but without much success.
My recent estimates for US sales (based upon current rates and adjusted for the season) is the total market will be in the low 15 million unit range. This is also in agreement with many analysts. Auto sales in the US dropped 12% in March. Chrysler outpaced the market with sales declining almost 20%. Even Toyota was down 10% for the month.
The general state of the US economy and declines in auto sales has sent the stock price of General Motors and Ford to 52-week lows. The sale of the Chrysler debt at pennies on the dollar is partly a relfection of the state of the market. However, I continue to believe this is a very accurate reflection of the state of the company. As I have stated in past articles about the future of Chrysler, the company relies on the US for almost all of its sales and is also very reliant on less profitable fleet sales to prop up their totals.
In the past 2 years, vehicles sales may well drop from about 17 million per year to an estimated 15 million in 2008. If the market drops to that level, I am sure Chrysler cannot survive without a drastic move by Cerberus to raise capital or seriously rethink Chrysler. As I outlined in The Failure of Daimler and Chrysler – A Paper, Merger - What next?, for all practical purposes, the company has not been profitable in almost ten years.
Chrysler CEO Bob Nardelli has stated the company lost $1.5 billion in 2007 and has about $7 billion in cash on had. These statements were made back in December of last year. Nardelli even admitted the company was funcionally bankrupt. Without a full public disclosure of the financial performance of the company it is impossible to know Chrysler's current cash flow position and burn rate.
However, given the company's total sales dropped 15% for the first 3 months of the year which includes a 22% drop in highly profitable trucks and SUV's, the cash flow position cannot be encouraging. I estimate in the first three months of the year, Chrysler's revenue dropped $1.5 billion on sales alone. Even factoring in the layoffs over the past 6 months, I highly doubt the company reduced their structural cost to account for the lost revenue. The company as of March appeared to have aligned production with demand as inventories were at the industry average of 74 days worth of product. Though the company still has excess capacity and is only running many of its plants on one production shift including two minivan plants. However, the inventory estimates for April have yet to be published by Automotive News and the March estimates do not factor in the sharp drop in sales.
In any case, I still believe the near term viability of Chrysler is still questionable and continue to wonder how Cerberus will walk away. Over the past several months, I have not seen anything that has left me encouraged.
I do believe Jeep remains a viable brand if Cerberus needs to raise capital but Chrysler and Dodge's equity in the market place is suspect. Although, Chrysler's manufacturing assets could give many overseas companies instant production capacity in the US even if they do not take on the remaining brands. Given the sharp decline in the value of the dollar, the US is looking like the next China for exports and many European manufacturers could use that to their advantage. (See Wall Street Journal Article)
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