Chrysler, the heavily indebted carmaker owned by the private equity giant Cerberus Capital Management, is pulling out of the vehicle-leasing business, in the latest sign of stress for the US auto industry.
Its Chrysler Finance arm, which leases rather than sells new cars to customers, is in the process of having to refinance $30bn (£15bn) of debt which is due to roll over next month, but the plunging second-hand value of its vehicles, particularly SUVs, is complicating the issue.
Drivers keen to get their hands on a new car often choose to lease them, and trade them in regularly for the latest models, and one in five new vehicles in the US is leased rather than bought outright. Carmakers tend to fund the business with short-term debt.
Analysts say the interest rate Chrysler Finance must pay on its debt is likely to reset much higher next month, partly because of tougher conditions in the debt markets since the credit crisis struck last year and partly because of the increasingly parlous state of the car industry.
Growing numbers of Americans are reluctant to drive the gas-guzzling SUVs and light trucks that Chrysler and its domestic peers, Ford and General Motors, specialise in, because petrol prices have soared. Ford's finance arm had to write-down the value of its portfolio of leased vehicles by $2.1bn this week due to reduced second-hand prices.
The higher funding costs for Chrysler Finance meant it would no longer be able to offer competitive rates on leasing, Chrysler vice-chairman, Jim Press, said last night. He said the company hoped to limit the loss of market share business by offering better deals on new cars for purchase.
Cerberus took over Chrysler from the German company Daimler in a €5.5bn (£4.3bn) deal signed almost a year ago, just before the credit crisis struck. Immediately, the expected financial performance of the company was blown off course and the sale of $12bn of Chrysler debt had to be postponed by its banks – and industry conditions have worsened ever since.
Unlike Ford and GM, Chrysler is no longer a public company required to disclose the state of its finances. All three major US automakers are engaged in a desperate battle to limit their losses by slashing jobs and other costs, reducing production and switching factories over to produce smaller, more fuel-efficient vehicles.
GM chief executive Rick Wagoner said yesterday there were no green shoots of recovery in the market. GM shares fell 9 per cent.