(Updates with regulator warnings in 10th paragraph.)
Dec. 6 (Bloomberg) -- Chrysler Group LLC is seeking to lower the interest rate on a $2.9 billion loan for the second time this year, underscoring the boom in junk-rated financing that led the U.S. Federal Reserve to warn about excesses in the market.
The U.S. automaker controlled by Italy’s Fiat SpA will propose to lenders Dec. 9 the new rate it wants to pay on the debt, according to a person with knowledge of the transaction, who asked not to be identified because the deal is private. Companies have cut borrowing costs by reducing rates on more than $250 billion of speculative-grade loans this year, up from $72.3 billion in all of 2012, according to Bloomberg and Standard & Poor’s Capital IQ Leveraged Commentary and Data.
Chrysler, which last month delayed an initial public offering, obtained the original loan in 2011, to help repay $7.6 billion provided by the U.S. and Canadian governments in 2009 to prevent its collapse. The transaction is taking place as call protection, or the restriction to replace the debt before it matures, gets lifted.
Chrysler may be able to lower the interest rate on the loan to 2.5 percentage points more than Libor with a 0.75 percent minimum on the lending benchmark, “given where other BBs are pricing,” Kip Penniman, an analyst at KDP Investment Advisors Inc., wrote in an e-mailed statement.
Chrysler, based in Auburn Hills, Michigan, currently pays interest at 3.25 percentage points more than the London interbank offered rate with a 1 percent minimum on the lending benchmark, according to data compiled by Bloomberg.
Chrysler’s term loan has a Ba1 grade by Moody’s Investors Service and BB by Standard & Poor’s. The company is rated B1 and B+, respectively.
Chrysler’s credit agreement provided lenders with six months of call protection at 101 cents, meaning Chrysler would have had to pay 1 cent more than face value if it repriced the debt during the six months after the deal closed.
“It’s very much a borrower’s market and a lot of deals are oversubscribed,” Robert Blank, head of leveraged-loan research at Xtract Research LLC, said in a telephone interview. “Very often lenders don’t push back as hard as they should. I fear that some borrowers will in fact be able to provide no call protection at all.”
The typical call protection in credit pacts has dropped to one percent for six months from one percent for one year, according to Xtract.
The Fed and the Office of the Comptroller of the Currency sent letters in recent months to some of the biggest banks asking them to avoid originating loans that can be considered “criticized,” or debt seen as having some deficiency that may result in a loss. The regulators identified forty-two percent of leveraged loans in that category this year.
The term piece began paying interest in 2011 at 4.75 percentage points more than Libor with a 1.25 percent minimum, Bloomberg data show. In June, the company lowered the rate on the credit to 3.25 percentage points more than the lending benchmark with a 1 percent floor.
The loan due in 2017 was quoted at 100.75 cents today, down from a high of 101.9 cents on Aug. 6, according to prices compiled by Bloomberg.
Chrysler has no borrowings under a $1.3 billion revolving line of credit that comes due in 2016, so the term loan is the company’s next maturity, Bloomberg data show.
Fiat said Nov. 25 that Chrysler will not carry out its IPO this year. Chrysler will continue to work on the IPO and may move forward with the process in the first quarter.
Katie Merx, a spokeswoman at Chrysler, declined to comment.
In a revolving line of credit, money may be borrowed again once it’s repaid; in a term loan it can’t.
--Editors: Chapin Wright, Faris Khan