Chrysler Closer to Standing on Own Two Feet Again

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Chrysler Group LLC (Auburn Hills, Michigan) has always been the youngest and smallest of the 'Big Three' American automakers. It's much larger siblings, General Motors Company (NYSE:GM) (GM) (Detroit, Michigan) and Ford Motor Company (NYSE:F) (Dearborn, Michigan), have dominated the automotive landscape in the United States, while Chrysler has been the tag-along--the company that was there, but just barely hanging on.

There was some doubt that Chrysler would survive the bankruptcy period that it shared with GM. However, thanks to the intervention by the U.S. and Canadian governments and Fiat SpA (OTC:FIATY) (Turin, Italy), Chrysler did manage to emerge intact, but with a new vision of itself and its role in the marketplace. Fiat and Chrysler executives have been working feverishly to reform Chrysler into a successful company, one that will not revisit bankruptcy, and the progress has been amazing. Chrysler took another major step in its recovery this week by coming to agreements with investors on refinanced loans, which will enable the automaker to repay the government loans it received as part of bankruptcy proceedings.

Chrysler will take out $2.5 billion in bank loans at a lower interest rate than what the automaker is currently paying the U.S. and Canadian governments. In addition, Chrysler will sell $3.5 billion in bonds to investors, while Fiat will pay out $1.3 billion in cash as part of a deal to increase its stake in Chrysler. These loans will enable Chrysler to repay the remaining $5.9 billion in loans from the U.S. government, while also paying the Canadian and Ontario governments $1.6 billion. By making these payments, Chrysler will be able to reduce its interest rate from the 12% that the governments were charging each year to a more modest 8% on the bonds, and 6% on the new bank loans. This savings will be key in Chrysler's road to issuing an initial public offering (IPO), which is likely to occur in 2012. In 2010, Chrysler paid approximately $1.2 billion in interest on its government loans.

While Chrysler will still owe the U.S. government about $2 billion, some or all of that could be recouped when the government sells its remaining stake in the company, which is likely to occur once Chrysler has filed its IPO. The Canadian and Ontario governments are likely to take a similar tact, although they hold a much smaller stake in the automaker. Under Fiat's management, Chrysler has made remarkable strides in its recovery, streamlining its management while cutting back on models it produces. Chrysler's sales have been steadily increasing, and the automaker showed a net income of $116 million in the first quarter this year. The automaker is hoping to report its first net profit since 2006 at the end of this year, as sales have remained strong throughout the first four months of 2011 and are likely to improve as the year progresses.

In addition, Chrysler has been investing in its infrastructure. The company has $1.7 billion in projects currently under way in the U.S and Canada, or planned for the near future. This project work revolves around retooling or expanding existing plants so they can handle the new vehicle models that the automaker is banking its future on selling.

A major expansion is under way at Chrysler's Belvidere, Illinois, assembly plant, while retools are being performed at its Sterling Heights, Michigan, plant and two of its Kokomo, Indiana, plants. A retool is expected to begin this fall in Toronto, Ontario. These projects were carefully considered and are taking place at facilities that are the backbone of Chrysler's manufacturing base in North America. The assembly plants that are being expanded and retooled are expected to receive new models for assembly in the coming year.

Chrysler, along with Fiat, has been taking recovery one step at a time, and has done so very successfully to date. Rather than rush things, Chrysler has been systematic about how it rebuilds itself, and this strategy has appeared to work. The automaker is getting closer to being on its own each and every month, and with profits rapidly increasing thanks to these efforts, the IPO will come sooner rather than later. Next year should be the year of Chrysler, the year when the automaker is finished with its government repayment and goes public once again, while unveiling additional new vehicles that will help the automaker compete with its larger brethren in the U.S.

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