The Treasury Department said Friday it will provide a $1.5 billion loan to Chrysler LLC's financing arm to be used for new vehicle loans in hopes of boosting sales and ultimately returning the domestic auto industry to profitability.
Chrysler immediately announced it will offer zero-percent financing on 11 Chrysler, Jeep and Dodge models and be able to provide financing to a wider range of applicants — including those will less than ideal credit.
The Treasury said the new aid will be in addition to the $17.4 billion in loans earmarked for both Chrysler and General Motors Corp. last month in an effort to buy time for the two companies to reorganize.
"This funding will better position us to withstand the current economic challenges until funding becomes available through more traditional commercial sources," Thomas F. Gilman, Chrysler Financial's vice chairman and chief executive, said in a statement.
The first $100 million under the loan is expected to be available next week.
The terms require Chrysler to pay interest at a rate 1 percentage point higher than the one-month the London Interbank Offered Rate for the first year, increasing to 1.5 points above LIBOR for the remainder of the five-year term. At Friday's LIBOR, that's an initial rate of about 1.36 percent.
A special purpose entity created by Chrysler Financial will also issue warrants to Treasury in the form of additional notes in an amount equal to 5 percent of the total size of the loan.
Battered Chrysler saw its sales plunge 53 percent last month, far worse than for GM or Ford Motor Co., and analysts have said it probably won't survive the year as an independent company — despite the $4 billion loan it received from the government. Chrysler had been counting on an additional $3 billion in aid for Chrysler Financial.
The government settled on $1.5 billion after consulting with Chrysler Financial in recent weeks and getting an assessment of the company's financial situation, said a government official who spoke on condition of anonymity because he wasn't authorized to speak publicly about the transaction.
Chrysler Financial will report to Treasury on its use of the money and other financial information, but government officials may block some of it from public disclosure because it could be considered confidential, the official said.
Unlike GM and Ford, Chrysler is owned by a private equity firm, Cerberus Capital Management LP, and is not required to publicly disclose details of its finances.
Jim Press, Chrysler's vice chairman and president, said Treasury's loan will allow Chrysler Financial to provide a larger number of customers with affordable financing, including those with credit scores in the 620 range.
"We have customers who want to buy our vehicles, dealers who want to order vehicles and employees who want to build cars," Press said in a statement. "Now with enhanced financing available in the system we can help our customers get the credit they deserve and help drive America forward."
Chrysler's zero-percent offer covers a variety of 2008 and 2009 models including the Chrysler Town & Country, 300 and 300C; Jeep Grand Cherokee, Commander and Wrangler; and Dodge Grand Caravan, Charger, Magnum, Challenger, Ram Pickup and Ram Heavy Duty.
The automaker said it plans to promote the offers through a media campaign set to kick off next week.
GM's financing arm, GMAC LLC, which is also controlled by Cerberus, received $5 billion from the Treasury Department in late December. In addition, the Treasury said it would lend up to $1 billion to GM so that the automaker would be able to buy more equity from GMAC.
Chrysler's aid differs from the aid to GMAC, which was an injection of capital into the new bank holding company into which GMAC had transformed itself to become eligible for federal money.
GMAC also loosened its tight lending standards, which had made it more difficult for would-be car buyers to get loans, by reducing its minimum credit score back to 621 from 700. The median FICO score is about 720 on a scale that ranges from 300 to 850, according to Fair Isaac Corp.
GM also announced a number of financing offers through GMAC including zero-percent financing on some models.
GMAC's move marked the first time that a financial institution said it will use money from the government's $700 billion bank bailout to offer more affordable credit to consumers.
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