Life after Chrysler

Cerberus has forgiven a $500m loan to the US automaker to help push through a sale to Italy's Fiat, bringing the Chrysler saga nearer an end. Christopher Witkowsky explores.

As part of a deal to resolve Chrysler conflicts and push through a plan to merge the bankrupt company with Italian vehicle manufacturer Fiat, private equity firm Cerberus is “forgiving” a $500 million loan to the company.

The loan was part of a debt package extended to Chrysler last summer that also included $1.5 billion from Daimler, Chrysler's former owner, according to a source with knowledge of the situation.

In December, Cerberus pledged to convert its debt in Chrysler to equity, and earlier this year the firm decided to donate all its equity in the company to assist in the rescue. The $500 million loan is a casualty of the rescue plan.

Cerberus wouldn't comment about where the $500 million loan came from – did the firm's LPs provide it? It's unclear.

The loss of the $500 million looks to be the final chapter in the short-lived, tragic saga of Cerberus' investment in the former iconic US car maker of legends including the 1970s classic Cordoba or the Imperial of the 1950s.

The tale appears to be coming to an end earlier this month after a bankruptcy court judge approved a deal under which Italian vehicle maker Fiat will buy Chrysler. As part of the deal, Daimler is forgiving almost $2 billion in debt and extending a $600 million payment to Chrysler's pension. Fiat will own 20 percent of the company and the United Auto Workers union will own 55 percent. Fiat's stake could increase to 35 percent if the company reaches certain benchmarks for production of fuel-efficient cars in the US.

Cerberus acquired Chrysler in a $7.4 billion deal that included a group of about 100 co-investors, according to the New York Times. One market source told PEO the co-investor group included several hedge funds.

The private equity firm, led by Stephen Feinberg, has come under some political pressure to pitch in to save Chrysler. Republican Senator Chuck Grassley told Reuters earlier this year that Cerberus should assist in saving the vehicle maker.

“Do they believe in Chrysler or don't they believe in Chrysler? If they believe in it, they ought to be helping,” Grassley said.

Cerberus has made some attempts to explain that its funds are not akin to “ATM machines”, in which executives can simply remove money and give it to Chrysler. But explaining the fundamental structure of a private equity fund to a politician seems like a waste of time – kind of like expecting a state attorney general to understand the difference between a crooked “finder” and a legitimate placement agent – they don't want to understand the differences, as long as their message achieves maximum political impact.

Cerberus has gone far in sacrificing capital in the name of Chrysler's resurrection. Along with donating its equity in the company, Cerberus also pledged to use the “first $2 billion of proceeds” from its financing arm Chrysler Financial to bolster the automotive operations of Chrysler.

With Cerberus' Chrysler crisis near an end, what does the future hold for the private equity firm? One source, whilst refusing to get into any detail, says the firm has been quiet, like the private equity industry in general, but has been active in the distressed investment arena.

The firm last year reportedly launched a fund to target distressed financial institutions, but there's been no word from the firm on whether any investments have been made in that sector. And while targeting financial institutions has been the strategy du jour among many big-name firms like Warburg Pincus, CVC and The Blackstone Group, will Cerberus have waited too long to join the party if it doesn't close a deal soon? (That same criticism has been leveled at the firm about its Chrysler deal – it waited too long to make what turned out to be an overvalued investment in the company, only for the investment to blow up in its face.)

In keeping with his uber-private nature, firm CEO Stephen Feinberg isn't broadcasting Cerberus' plans, but a host of people in the private equity industry and beyond will certainly be watching for its next move.