Cerberus drops $4bn Chrysler bond as credit crunch bites
The credit market crisis is causing three headaches for Cerberus Capital, the private equity firm named after the mythical, many-headed hound of Hades.
The firm was yesterday working on a turnaround plan for its GMAC Finance business, which it part-owns with General Motors and whose residential mortgage business is perilously close to breaching debt covenants that could result in its tipping over into bankruptcy.
At the same time, financiers for Chrysler, the carmaker purchased by Cerberus earlier this year, were forced to abandon a $4bn (£1.94bn) bond sale, raising fears that investors are turning their backs on the market for loans from highly leveraged private equity-owned companies. The news came a day after Cerberus was sued in a US court over its attempt to wriggle out of another leveraged buy-out deal it signed in the summer.
On the other side of the Atlantic, Cerberus is one of the parties trying to bail out the stricken mortgage business Northern Rock. But in the US, this trio of problems has put the firm in the spotlight as jittery investors search for information on how the credit market crisis is affecting real businesses and existing business deals.
Shares in General Motors slid to another 12-month low yesterday on fears for the future of GMAC, in which it sold a 51 per cent stake to a Cerberus-led consortium last year. GMAC was set up to offer car loans, but had expanded rapidly into the residential mortgage market, where its loans to low-income Americans are facing rising defaults. The net worth of the ResCap division has fallen to $6.2bn and it will be in breach of promises to its lenders if it falls below $5.4bn.
Credit analysts fear that further write-offs are looming at ResCap – in a part of the business that lends money to the ailing housebuilding industry – that could push the net worth lower. "A combination of new impairment charges and loan losses could easily trigger a covenant violation," said GimmeCredit analyst Kathleen Shanley.
GMAC's owners may choose to put ResCap into bankruptcy rather than refinance it, she said, although Cerberus appeared keen yesterday to avoid that outcome. An update could come later this week.
New York-based Cerberus was founded in 1992 by the financier Steve Feinberg, and counts the former US vice-president Dan Quayle and former US Treasury secretary John Snow among its senior executives. One of the largest private-equity firms in the world, it controls companies with annual revenues of over $120bn. It took over Chrysler, America's third-largest car-maker, in August but its planned refinancing of the company's debt has already been twice delayed.
The latest, modest attempt saw underwriters including JPMorgan Chase and Goldman Sachs trying to unload a $4bn tranche, less than the $7bn still on their books. Investors balked even at a price of 97 cents on the dollar, raising the possibility that the underwriters will have to swallow further losses.
Cerberus said that the underwriters have already guaranteed funding for Chrysler, but the lack of demand now could complicate further financing plans if the credit markets do not improve.
On Monday, United Rentals filed a lawsuit seeking to force Cerberus to complete its $4bn buy-out of the equipment rental company. Cerberus pulled its takeover offer the previous week.