AP source: Credit trouble slowing GM-Chrysler deal

[October 21, 2008]  DETROIT (AP) -- A potential deal for General Motors Corp. to acquire Chrysler LLC is slowly moving forward, but the transaction is being hampered by an inability to borrow the money needed to make it happen, according to a person involved in the financing discussions.

The person, who requested anonymity because the talks are private, said Monday it could be a couple of weeks before a deal is completed, if it goes that far.

The person also said the federal government may have to contribute money in order to make the deal work, although he was unsure if the government has been approached.

GM has been talking with Chrysler owner Cerberus Capital Management LP for at least a month about acquiring the struggling automaker, as Cerberus tries to exit the auto business and GM seeks Chrysler's cash stockpile of about $11 billion.

If the deal is consummated, GM likely would close factories, lay off thousands of workers and perhaps even close Chrysler's giant Auburn Hills, Mich., headquarters.

To do so, GM likely would need to borrow more money for severance packages and other restructuring costs. But that just isn't available right now for a company with a junk credit rating and liquidity concerns like GM, said John Atkins, a fixed-income analyst at IDEAGlobal.com.

If it could sell bonds, GM, would likely have to pay an excessive interest rate "north of 20 percent," Atkins said. "We're talking about a company that is well down the credit ladder."

Fitch Ratings reduced GM's credit rating one notch to "CCC" last month, and Standard & Poor's Rating Service has placed its "B-" rating of GM under review for possible downgrade. Both ratings are noninvestment, or junk, grade.

Atkins said Cerberus and GM likely are running out of options as the U.S. auto market continues its slump and both Chrysler and GM continue to burn up cash.

Analysts have said GM has little to gain strategically from taking on Chrysler, but Atkins said it may give the company leverage with bankers who are reluctant to make loans and to get more concessions from the United Auto Workers union.

The Wall Street Journal reported Monday that the companies were having trouble arranging financing.

On Friday, another person briefed on the negotiations said top executives of Cerberus and Chrysler had viewed the deal and asked for refinements.

In August, Chrysler said it had accumulated $11.7 billion in cash and marketable securities as of June 30. That figure remains around $11 billion, the same person said, even though Chrysler's U.S. sales are down 25 percent through September, the largest decline of any major automaker.

Detroit-based GM is burning up more than $1 billion per month, with several analysts predicting it will reach its minimum operating cash level of $14 billion sometime next year. GM's sales are down 18 percent, and the company has lost $57.5 billion in the past 18 months, although much of that comes from non-cash tax accounting changes.

GM has pledged to raise $10 billion through cost cuts and another $5 billion through asset sales and borrowing as it tries to outlast a U.S. auto sales slump that could run into 2010.

Company spokeswoman Renee Rashid-Merem said GM is on track with the operational part of that plan.

Chrysler's money pile would help solve GM's cash problem if the credit markets remain inhospitable.

Both automakers have had to deny bankruptcy rumors in recent weeks, saying consumers won't buy cars from a company that looks like it could go out of business.

The deal being discussed calls for Cerberus to hand over Chrysler in exchange for GM's 49 percent stake in GMAC Financial Services. GM sold a 51 percent stake in its finance arm to Cerberus in 2006. Cerberus also would get an equity stake in GM, hoping to get a good return should GM recover when U.S. auto sales bounce back from a serious slump.

Other automakers, including the allied companies of Renault SA and Nissan Motor Co., also are in discussions about Chrysler, the person said. Simultaneously, Cerberus, which bought 80.1 percent of Chrysler from Daimler AG in a $7.4 billion deal last year, is negotiating to acquire Daimler's 19.9 percent stake.

All that GM, Chrysler and Cerberus have said about the negotiations is that automakers meet all the time. Chrysler Chief Executive Bob Nardelli said Thursday the auto sales drop has created an environment that favors consolidation.

[Associated Press; By TOM KRISHER and JOE BEL BRUNO]

AP Business Writer Joe Bel Bruno reported from New York.

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