Chrysler may see cash squeeze from finance arm costs

By Poornima Gupta - Analysis

DETROIT (Reuters) - Chrysler LLC could face a squeeze in cash as higher borrowing cost for its finance arm would make it more expensive for the struggling U.S. automaker to offer cheap loans and other discounts to buyers.

Chrysler Financial's $30 billion credit facility, used to finance the automaker's vehicle sales, is up for renewal in early August and the lender could see its borrowing costs rise amid the continuing credit market turmoil, a source familiar with the situation told Reuters.

Higher borrowing cost for the lending arm means it would be more expensive for Chrysler to offer zero-percent loans and other rebates to consumers, increasing Chrysler's cash burn, said Kam Hon, a credit analyst at DBRS.

"It will hurt their margins," Hon said. "It will definitely put a dent on Chrysler's (financial) performance."

Chrysler and other automakers offer loans to consumers for vehicle purchases and lend money to dealers to finance their inventory through captive lending arms.

Chrysler Financial has a $70 billion portfolio comprising loans to consumers and dealers, spokesman Bill Porter said, adding that the company is still finalizing details of the credit facility's renewal and it was too early in the process to talk about any impact on the company.

Chrysler, pushing to turn around its operations nearly a year after being acquired by private equity firm Cerberus Capital Management LP CBS.UL, is currently offering zero percent financing for six years on some 2008 Dodge Ram pickup trucks. It also has thousands of dollars in cash incentives on many of its vehicles.

A Chrysler spokeswoman said on Monday the automaker will continue to offer competitive finance and lease offers for its customers and dealers.