NEW YORK (Reuters) -- Chrysler Group LLC, seeking to raise $6 billion in new debt to repay government loans, is expected to restructure its proposed refinancing package this week after investors showed hesitation over the loan portion of the transaction, people familiar with the matter said.
Chrysler executives, led by CEO Sergio Marchionne, have been meeting with potential investors since early March to market a $3.5 billion term loan and $2.5 billion of second-lien bonds, with the target of completing the loan transaction by May 18.
But the automaker is likely to reduce the size of the loans from $3.5 billion because potential investors have been slow to commit after weighing the facility's large size and the company's business prospects, people familiar with the matter said.
Chrysler is attempting to sell one of the biggest corporate loans issued since the financial crisis.
The loan market's limits have also been tested this month by the appearance of a number of other, large leveraged transactions, including a multi-billion dollar deal by auto supplier Delphi Automotive.
The timing of Chrysler's deal has been further complicated by the process of getting consensus from the U.S. government, the Canadian government and Fiat, The Wall Street Journal reported Sunday, citing people familiar with the matter.
Given the sluggish initial interest, the bank loan portion of Chrysler's refinancing deal is likely to have to carry a higher interest rate than the currently proposed 5.5 percent to 5.75 percent, the sources said.
They added that the $2.5 billion bond portion of the transaction has attracted a strong response from potential investors and could be enhanced - with a corresponding decrease to the loan.
The refinancing deal, which the U.S. automaker hopes to complete by May 18, would help Chrysler repay all of its more than $7 billion debt owed to the U.S. and Canadian governments stemming from its 2009 bailout. Chrysler would repay the government loans by the end of June.
Chrysler and its larger U.S. rival General Motors Co took a federal bailout at the height of the financial crisis in 2009 as auto sales collapsed and consumer credit dried up.
While the U.S. auto industry has recovered in the past two years, Chrysler has remained saddled with high-interest government loans, which bear interest rates from around 7 percent to 20 percent.
Chrysler's refinancing deal has struggled in part due to the troubled history of the company, as well as an increase in supply of new leveraged loans that launched for syndication in recent days, potential investors said.
"In a market like this, trading sideways and with so much supply, people can afford to be choosy, especially when it comes down to a name where you have lost money before," one of the investors said.
A second investor looking at the deal earlier this week said that pricing on the transaction may not adequately compensate lenders for the risk involved in the loan.
Conference call with CEO
A third investor who was shown the deal said that given the large size of the loan, lenders didn't feel pressed to rush in.
"Worst case, they can always pick it up in the secondary market," he said, adding that Chrysler's car lineup consists mainly of larger models that use more gasoline and that the company is relying on the Fiat brand, which is not widely known in the U.S. market.
All the investors declined to be named because they were not authorized to speak with the media.
Marchionne, also CEO of Fiat, held a rare conference call with potential loan investors on May 12 to address questions from analysts who had not had an opportunity to examine the automaker since its 2007 sale to private equity firm Cerberus Capital Management and subsequent alliance with Fiat.
Investor questions focused on the company's relationship with Fiat and its plans to manage debt over the long term, according to people familiar with the matter, The Wall Street Journal reported Sunday.
Chrysler, which holds around $10 billion of cash on its balance sheet, will have $3.5 billion net debt after the refinancing deal and plans to cut that figure to zero by 2014, the Journal reported.