Last autumn, hordes of British motorists laid siege to petrol pumps, anxious to fill up before prote...
Last autumn, hordes of British motorists laid siege to petrol pumps, anxious to fill up before protests against fuel prices blocked supply trucks and left the gas stations dry. DaimlerChrysler's $6.5bn bond sale smacks of similar desperation.
The German-US car maker is filling up the tank while it can, and paying through the nose to do so. It's been running on close to empty - not a good situation to be in when you face debt repayments of some $9bn this year and $14bn in 2002.
The company's net liquidity, which measures cash against liabilities, dropped to zero in December, from E11bn a year earlier.
Cash and securities holdings at its industrial unit have plummeted by more than E5bn in the past year to about E10bn.
That huge sucking sound is the noise Chrysler makes as it drains the financial health from its German-based parent.
Xerox demonstrated last year the dangers of letting cash reserves drop dangerously low. While DaimlerChrysler's financial straits are nowhere near as dire as those facing Xerox, the example set by the US copier-maker goes a long way to explaining why the car company is paying so much for its money - trashing the secondary-market values of its own bonds as well as auto bonds in general.
The E2.75bn of three-year notes that DaimlerChrysler is selling, for example, will be priced to yield about 132 basis points more than swap rates.
That's a premium of about 30 basis points to where existing DaimlerChrysler bonds with a similar maturity were trading before the terms of the new sale were announced.
For fixed-income investors, happy days. DaimlerChrysler was initially expected to raise just $4bn in the bond sale.
But bond investors are shipping in as much of the new issue as they can get their hands on, figuring that there's enough of a cushion in the yield air bag to protect them against another crash in the company's earnings and credit ratings down the road.
For stock investors, however, alarm bells should be ringing. Last year's share price slump of almost 40% made DaimlerChrysler the worst performer among the big car makers. So far this year, the stock has only rallied by about 1%.
"The increasingly important issue is not earnings, but cash position and cash burn,'' say analysts at Morgan Stanley Dean Witter in a note to clients. "This adds even more pressure on the company to either cut the dividend, cut capital expenditure or sacrifice the credit rating. Chrysler appears to be burning cash at a much faster rate than expected.''
Moody's Investors Service is still reviewing its A2 rating of DaimlerChrysler's $75bn of debts, focusing on any "cash restructuring charges", as well as "the longer-term competitiveness of Chrysler's model line-up", the US unit's cost structure and how the company plans to combat a slowdown in US demand for the kinds of cars Chrysler sells.
Moody's cut the rating by one notch in December.
Daimler-Benz paid $35bn for Chrysler in 1998 to form DaimlerChrysler. Chrysler, which focuses on sport-utility vehicles, minivans and light trucks, has turned into a disaster for its German owner, with US car makers having to offer discounts that climbed 30% last year, and by almost three times in three years, to attract buyers.
A letter to shareholders dated 18 December and filed with the Securities and Exchange Commission, contains the following paradoxical statements: "Over the next five years, we will renew more than 80% of our product range by launching up to 60 new models," the company says.
It then goes on to explain that part of the problem at Chrysler was the introduction of four new models because "launching so many products in such a short space of time is expensive" due to "significant up-front costs, both in terms of marketing spend on the new product and the need to offer discounts on the old product to clear stock levels."
So life is good because DaimlerChrysler has lots of new models in the pipeline, and life was bad because it's tough to introduce new models. Analysts at Deutsche Bank reckon the company's existing five-year dollar bonds yield about 240 basis points more than US Treasuries, suggesting the bond market is already discounting at least a one-notch downgrade in the rating. That spread is up by 100 basis points in recent months.
Even at the juicy yields available on the new bonds, investors should ask themselves whether they're convinced that the BBB-rating category doesn't beckon for DaimlerChrysler.
Mark Gilbert via the Bloomberg London newsroom
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