Goldman Sachs sold $500 million of Chrysler LLC loans Wednesday, to an investor group that included hedge funds. The deal was concluded at a price of 63 cents to the dollar.
This reflects the mounting pressure on both the struggling automaker as well as its bankers since a $7.4 billion deal which took the company private last year. Goldman originally held about $1.6 billion of the $7 billion loan issued to finance Cerberus Capital Management LP's purchase of an 80% stake in Chrysler Group from Daimler Chrysler AG. Goldman has already sold about $300 million of its exposure earlier.
The debt carries a coupon rate of 6.71%, but at the discounted price it offers an yield of over 20%. The debt is currently trading at 64 cents to 66 cents, which indicates a sort of revival for the debt in question. The sale price reflects the troubles facing the US auto industry, with Chrysler in particular, as well as the continuing turmoil in the financial markets.
Auto sales in the US are down 8% for the first quarter, with a drop of 12% in March alone. Chrysler has performed poorly with its sales down 14% for the first quarter compared to a year earlier. The decline is blamed on shaky consumer confidence, high fuel prices and fear that a recession is setting in.
As for the banks, getting these leveraged buyout loans , or LBO's, off their balance sheets is a high priority area, as it will release money, currently tied up in illiquid loans, which can then be used elsewhere. Major US banks including Goldman have reduced their holdings of LBO's to $129 billion from $163 billion at the beginning of the year, by selling them at a discount. Some of the same LBO firms that generated the debt in the first place are raising funds to buy it back at reduced prices! The fact that they are able to do so offers a ray of hope to banks that maybe the worst is behind them.