Fiat SpA (F) stands to earn three times as much from a Chrysler Group LLC dividend this year after the U.S. carmaker refinanced debt and changed the terms attached to the funding, people familiar with the matter said.
The new debt covenants place lower restrictions on the size of the dividend Fiat can collect from Chrysler, which the Italian company controls with a 58.5 percent stake, said the people, who asked not to be identified because the details have not been announced. Fiat for 2013 may collect $936 million as a result of the changes, up from a maximum of about $300 million under the old terms. Chrysler and Fiat declined to comment.
Chrysler closed on the refinancing this week of $3 billion that it borrowed in 2011 to repay loans from the U.S. and Canadian governments given during the automaker’s 2009 bailout.
With the refinancing, Sergio Marchionne, chief executive officer of both automakers, has taken another step in merging the two into one trans-Atlantic carmaker. The move will also aid the struggling Italian automaker since Chrysler has become the group’s profit driver. Fiat reached a separate agreement yesterday to refinance 2 billion euros ($2.62 billion) of its debt.
Chrysler said in a statement yesterday its refinancing will reduce annual interest costs of the term loan by about $50 million. The company also said “certain loan covenants” were amended, without providing specifics. Investors received a one-time call premium of $29.5 million, according to the statement.
Under the new debt covenants at Chrysler, the automaker can pay its owners, which are Fiat and the United Auto Workers retiree health-care trust, a dividend of 50 percent of net income, plus a one-time payment of $500 million in cash, the people said.
Chrysler, based in Auburn Hills, Michigan, is targeting net income of $2.2 billion for this year. If the American manufacturer awards its maximum dividend, plus the $500 million, it would pay out $1.6 billion for 2013, one of the people said.
With its majority stake, Fiat could collect $936 million. The UAW trust would get the rest. Chrysler’s board would have to approve the dividend. The current debt has a covenant restricting Chrysler’s dividend to Turin-based Fiat and the UAW trust at $500 million.
The new debt covenants also waive a minimum cash balance and cash flow requirement needed to pay a dividend. Since the dividend is based on profit, Chrysler would only pay out money if the company is profitable. The covenants were changed with the refinancing of the debt to match similar terms to other Chrysler debt instruments, the people said.
The company may not elect to pay a dividend until after Fiat buys the remaining ownership stake from the UAW trust, one of the people said. If Marchionne waits to pay the dividend until after a deal is struck with the trust, he would consolidate cash within the Fiat and Chrysler coffers.
Marchionne, 61, has spent the past four years working to unify Fiat and Chrysler so they can better compete with Toyota Motor Corp. (7203), General Motors Co. (GM:US) and Volkswagen AG. (VOW)
First, he has to buy the rest of Chrysler from the union’s retiree health-care trust. Marchionne said this month that Fiat was in talks with the trust about buying its stake and is seeking to complete a deal before a potential Chrysler initial public offering requested by the trust is held. Marchionne said that talks with the trust are “fundamentally” about price.
Last year, Fiat asked Delaware Chancery Court Judge Donald Parsons to rule that a call-option agreement covering some shares held by the union’s trust are worth $139.7 million. The trust puts the value as high as $342 million. A decision, either valuing the shares or forcing a trial, could come as soon as next month, although there’s no solid deadline.
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