Jul 26, 2007 4 min read

NEW YORK (AP) – Chrysler Group’s sale to a private-equity firm was put back on track Wednesday after a group of Wall Street banks agreed to assume the bulk of a $12 billion debt sale that failed to attract buyers. Bankers have been unsuccessfully marketing the financing package to major institutional investors since June, but recent turmoil in the mortgage industry has weakened demand for leveraged loans and high-yield debt. With no investor appetite, the seven banks led by JPMorgan Chase & Co. will instead keep the debt on their books.

For buyout shop Cerberus Capital Management, it was one of the few ways to keep its $7.4 billion acquisition on track. But it was a stunning turn of events that indicated investors were not comfortable taking on debt of the troubled automaker, and showed just how cold the U.S. credit market has grown.

“Typically on Wall Street you can get anything done at any price, and they weren’t able to,” said Shelly Lombard, senior high-yield credit analyst at research firm GimmeCredit. “This just seldom happens when banks have to do something like this. Nobody wants to catch a falling knife, and this is going to have an impact throughout the market.”

The banks will front about $10 billion as a loan, according to people familiar with the deal who spoke on condition of anonymity because they were not authorized to speak publicly. They could come back to the market after the summer when investors are more active.

The buyout shop and DaimlerChrysler AG will be on the hook to fund the other $2 billion. The terms of the financing arrangement would allow both companies to be repaid before the banks if there is a bankruptcy.

None of the involved players would comment on how Cerberus and Daimler are splitting that $2 billion amount, or whether Cerberus would have to somehow compensate the banks for taking on the debt themselves.

But with the financing secured, both Cerberus and DaimlerChrysler said they expect the sale of the Auburn Hills, Mich.-based carmaker to be completed soon. DaimlerChrysler will hold a stake of less than 20 percent in Chrysler once the deal is completed, ending a stormy nine-year combination of the two storied companies.

The financing of Chrysler has been closely watched because it is the biggest transaction yet to go before investors amid deepening woes in the credit markets. Other banks on the deal include Citigroup Inc., Morgan Stanley, Bear Stearns Cos., Toronto-Dominion Bank, and the Royal Bank of Canada. They could not be reached for comment.

Any drought in the high-yield debt market could drive up the costs of leveraged buyouts, and that would hurt one of Wall Street’s biggest catalysts for both stock and profit gains. Cerberus is still planning to raise a total of $62 billion to recapitalize Chrysler and refinance its debt.

Yet more than $16 billion worth of leveraged loan and high-yield bond deals have been canceled or postponed so far this summer, according to Fitch Ratings.

A spokesman for Cerberus would not comment about the new financing plan, but said the acquisition is still on track to close in the coming days.

Bankers have had a better time raising about $6 billion in loans for Chrysler’s finance unit, though terms had to be sweetened. That financing, which also closes on Aug. 3, was better received because the debt was backed by automobile loans made by Chrysler.

The large amount of debt already in the market from the nation’s two other troubled carmakers, Ford Motor Co. and General Motors Inc., may have weighed on investors. There also were concerns about how Cerberus will fare in managing the company, especially as it navigates its way through talks with the United Auto Workers, analysts said.

Either way, it represents a big change for the market – and for banks – as a whole, said Standard & Poor’s credit analyst Gregg Lemos-Stein.

“We know that Chrysler will be a stand-alone entity, and they have a set of challenges to address in North America like other automakers,” he said. “But, liquidity has been supporting auto suppliers and automakers in the past, and we have the beginnings of what may be a change to that environment. And, that’s very important.”

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AP Business Writer Tom Krisher contributed to this story from Detroit and AP Business Writer Matt Moore contributed from Frankfurt.

AP-ES-07-25-07 1652EDT