Chrysler Corp. Chairman Lee A. Iacocca said yesterday that the final major obstacle blocking $400 million in new government loan guarantees for the company has been eliminated with an agreement between Chrysler, a handful of New York banks and the government's Loan Guarantee Board.
"It all went together last night [Monday] about 8 p.m.," Iacocca said in an interview in the New York Yankee clubhouse at the Yankees' Fort Lauderdale spring training camp. "It's real good news."
The compromise should clear the way for final approval of the $400 million in loan guarantees by the government board and its scheduled meeting Friday, permitting Chrysler to sell notes for that amount, a company official said.
This latest infusion of government-backed financing had been in doubt when four or five New York banks led by Citibank, insisted on an immediate cash payment to cover a portion of their already outstanding Chrysler loans.
Under the compromise to which Iacocca referred, Chrysler will pay approximately $30 million to a group of 120 banks and insurance companies -- a settlement equal to 5 5/8 cents on the dollar on some $500 million in Chrysler debt.
Citibank and the other major New York banks had wanted the payment as soon as the loan board approved the $400 million on loan guarantees, but the loan board would not go along. Instead, the compromise provides that Chrysler must make the payment in 30 days, a company official said.
The arrangement reportedly has the blessing of the loan board headed by Treasury Secretary Donald T. Regan, whose staff has insisted on a package of financial concessions and sacrifices by Chrysler, its employes, suppliers and creditors -- the banks and insurance companies.Without these concessions, Chrysler cannot recover financially, the treasury staff determined.
For Iacocca, however, the worst of the battle apparently was over. Wearing a sports shirt, shorts and running shoes, he was overseeing the Yankee training camp as the guest of owner George Steinbrenner, "in hiding" from financial reporters, as Steinbrenner put it.
"In the end, it was the Big Four holding out in New York," said Iacocca, referring to the New York banks without naming them. Citibank and Irving Trust Co. are two of the four, banking officials disclosed.
The agreement is in Chrysler's interests, he said, eliminating $1.1 billion in debt and saving $200 million in interest charges this year. Chrysler's creditors will, in effect, write off some $500 million of the debt, accepting $800 million in preferred Chrysler stock in return.
Chrysler will not pay dividends on the preferred stock until after it repays the government-guaranteed loans -- it has already borrowed $800 million with the help of the treasury guarantees, and the newest installment will raise the total to $1.2 billion.
The cover the remaining $500 million in debt, Chrysler has agreed to pay creditors 30 cents on the dollar. Under the original financing plan worked out by the treasury staff in January, Chrysler did not have to make the initial payment until May, and then only if it wanted to. Under the compromise, it must pay the first 5 5/8 cents to the banks -- payment of the rest of the 30 cents is still up to Chrysler.
Although the amount was a fraction of the banks' claims against Chrysler, it was vital symbolically, said an official of one of the "holdout" banks, who asked not to be identified.
The banks, he said, were asked to make a significant concession to Chrysler, and were not getting much in return from the company. By insisting on a mandatory cash payment on at least a portion of the debt, the banks would be reaffirming the principle that such concessions are not free, the bank official said.
In addition, some of the banks are skeptical about Chrysler's long-term chances for survival -- many of them reportedly have already written off their Chrysler debt as uncollectable, banking and regulatory sources say.
But doubts about Chrysler's future were not the main reason why the group of banks demanded a cash payment from Chrysler, a banking official said. Conceivably, other companies in deep financial trouble could ask for help, as Chrysler has, he said.
"We were worried about the precedent," he said.