Chrysler borrows $2B, despite having money

Analysts say funds may be needed to reshape car lineup, compete globally.

Eric Morath / The Detroit News

Chrysler LLC tapped a $2 billion loan Tuesday — partially funded by its former parent Daimler AG — giving the Auburn Hills automaker an infusion of cash amid plummeting sales and difficult-to-access credit markets.

Chrysler was contractually obligated to take the funds before Aug. 3, the one-year anniversary of Cerberus Capital Management LP’s purchase of Chrysler from Daimler. Daimler, which maintains a 19.9 percent stake in Chrysler, secured $1.5 billion of the $2 billion loan; Cerberus holds the rest.

Cerberus and Chrysler officials say drawing the loan simply meets a contractual obligation, but analysts say the automaker may need the cash as it seeks to revamp its product lineup, which leans heavily on the trucks and SUVs that consumers are now shunning in favor of smaller, more fuel-efficient vehicles.

"Chrysler is merely meeting their legal obligations by drawing down that money," Cerberus managing director Tim Price said in a statement. "As announced previously, Chrysler exceeded its underwriting plan in 2007 in virtually every financial metric, perhaps most significantly in cash."

Falling automotive sales were not a factor in Chrysler obtaining the loan Tuesday, said spokeswoman Shawn Morgan.

"The drawdown … is not related to current economic conditions," she said. "Chrysler has a clear strategy to build a profitable enterprise for the long term as an independent company, even in this challenging economy."

Earlier this month Chrysler Chairman and CEO Bob Nardelli said the automaker finished last year with $9 billion in cash — ahead of Cerberus’ expectations. Despite that, analysts say the automaker will need to spend heavily to reshape its product lineup and compete with more global competitors.

"In tapping the loan now, it shows that they need cash," said Aaron Bragman, a research analyst with Global Insight Inc. He said Chrysler is wise to take the funding, even if it’s not needed for immediate operations, so it can put the money in the bank or invest it in future products.

Bragman said he questions if the automaker is as financially sound as executives claim, especially considering the automaker’s sales are down nearly 20 percent compared to last year, through May.

"We keep hearing that all targets are being met," he said. "Either that’s not the complete truth, or their targets are rather low."

Chrysler has not reacted to this year’s collapsing sales market in the same way as its crosstown rivals General Motors Corp. and Ford Motor Co., both of which have announced layoffs, plant shutdowns and a realignment of their product mix in recent weeks. Last November, Chrysler cut 12,000 jobs, purged four models and eliminated shifts at five assembly plants to bring production in line with demand.

Chrysler could have its liquidity stressed as soon as late next year, Moody’s Investors Service said Friday. Previously the analysts said the automaker had ample cash to meet its requirements into 2010 — when health care savings achieved in last year’s United Auto Workers contract kick in.

"As a result of the challenges that Chrysler may face in contending with the ongoing shift in demand away from trucks and SUVs," Moody’s analyst wrote in their report, "the company will likely face large cash requirements during 2008 and 2009 that will considerably narrow its liquidity position relative to earlier expectations."