UPDATE 2-DEALTALK-Chrysler debts come back to haunt banks

(For more Reuters Dealtalks, please click [DEALTALK/])
(Rewrites paragraph 9 with update on talks with lenders)
By Megan Davies
NEW YORK, April 3 (Reuters) - The star-crossed $7.4 billion
Chrysler buyout is not just a headache for private equity firm
Cerberus Capital Management, but some of the biggest banks on
Wall Street as well.
Chrysler is operating thanks to $4 billion of government
loans and seeking more. A possible bankruptcy could be a
solution for the company, which is racing to complete a tie-up
with Italy's Fiat SpA .
With a worst-case scenario being liquidation and the best
case a deal with Fiat, the way the auto company's future plays
out will impact the recovery lenders can expect. Chrysler
reached an agreement with Fiat in March on the framework for an
alliance.
Five Wall Street banks -- J.P. Morgan Chase & Co ,
Bear Stearns, Goldman Sachs Group Inc , Citigroup Inc
and Morgan Stanley -- underwrote the financing
when the deal was agreed in the summer of 2007. They provided a
$7 billion term loan that provided working capital for the
automaker.
Portions of that senior secured debt were sold to roughly
50 other institutions, a source familiar with the credit group
said. Banks typically look to reduce exposure by selling part
or all of their debt, although the syndication hit the markets
in the wake of the subprime mortgage meltdown, making it harder
to sell this debt on. Some exposure still remains on some of
their books.
JPMorgan's purchase of Bear Stearns meant its exposure
increased. Two sources familiar with the credit group said
JPMorgan has about $2.5 billion in total exposure to Chrysler's
auto business, but it is unclear how much of that has been
hedged or at what value it is being held on the bank's books.
Citi has under $1 billion, one of the sources said.
Goldman Sachs sold some of its loans last year, sources
previously told Reuters LPC.
All the banks declined comment.
The banks are now in talks with the government about
reducing Chrysler's debt by swapping some of it out for equity,
new debt or a lesser amount in cash, sources familiar with the
talks said on Friday. [nN03359875]

The banks have the highest priority debt -- senior secured.
That would normally take priority over other debt in a
bankruptcy, although one source familiar with the situation
said that, given the complexity on the situation, it is
unlikely to be a normal bankruptcy.
The other debt is a second lien loan of $2 billion held by
Daimler and Cerberus, a third lien loan of $4 billion held by
the U.S. Treasury and an obligation to fund the employee
retirement plan. In part, how much the banks get depends on how
negotiations with Fiat progress, said a source familiar with
the process.
The bank debt is worth far less than $7 billion on the open
market. The average bid for Chrysler's automotive operations
bank loan is around 15.2 cents on the dollar.
"The best case for the senior secured is a deal with Fiat:
They cut the deal, Chrysler survives as a going concern and it
turns out that the value of the going concern is enough to pay
them off in full," said Douglas Baird, professor of law at the
University of Chicago.

INVESTOR PAIN?
It is unclear how much Cerberus, which has both debt and
equity holdings, would lose.
Cerberus, along with a consortium of co-investors, bought
its 80.1 percent stake in Chrysler and the auto company's
financing arm Chrysler Financial in May 2007 for $7.4 billion,
investing $5 billion to improve the automotive group, pumping
$1.05 billion into its financing unit and paying $1.35 billion
to the seller, DaimlerChrysler.
That followed its acquisition the previous year of a 51
percent stake in General Motors financing arm GMAC.
The Chrysler and GMAC investments combined make up less
than 7 percent of Cerberus' total investments, a source
previously told Reuters. The Chrysler investment makes up less
than 5 percent of any one of Cerberus's several funds, a source
familiar with the situation said on Friday.
Cerberus has long been prepared for a loss on the equity
side. It said last year it would agree to forgo any profits
that could be earned relative to Chrysler as a result of any
financing the government may choose to provide.
"To assist the administration in the restructuring of
Chrysler, we agreed to give up our equity stake in Chrysler
Automotive, convert debt to equity and subordinate $2 billion
of other interests to the government's financing," Mark
Neporent, Cerberus' Chief Operating Officer and General
Counsel, said in a letter to the New York Times in February.
If Cerberus' debt is swapped for equity, Cerberus could end
up with a small equity position in the new car company, a
source familiar with the situation said, although that would be
determined by the Government.
One investor in Cerberus' funds who talked to Reuters on
condition of anonymity, said limited partners -- the pension
and endowment funds that put money in private equity funds --
had themselves written off the Chrysler investment when
Cerberus said it would give up its equity stake.
"Once that happened for the LPs, its already worth
nothing," said the investor.
The investor said Cerberus has "a hole to dig out of," but
the firm has done a lot of other lower-profile deals that are
performing well.
Cerberus has written down the value of the investment
stake, according to a source. But it was unclear what value the
private equity firm has put on the company.
German automaker Daimler AG -- Chrysler's former
owner -- controls the remainder of Chrysler. Daimler has
written its stake down to zero.
(Additional reporting by Caroline Humer, Jui Chakravorty and
Dan Wilchins in New York and Faris Khan at Reuters LPC; Editing
by Andre Grenon)
((megan.davies@thomsonreuters.com +1 646 223 6112; Reuters
Messaging: megan.davies.thomsonreuters.com@reuters.net))
((For more M&A news and our DealZone blog, go to
http://www.reuters.com/deals))
Keywords: DEALTALK CERBERUS/CHRYSLER

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