By Ben Klayman
DETROIT (Reuters) - Chrysler Group LLC on Tuesday paid back $7.6 billion in U.S. and Canadian government loans from its 2009 bailout, a move that allows the U.S. automaker to distance itself from an unpopular bailout and deepen its ties with Italian automaker Fiat SpA.
Chrysler said it had made payments of $5.9 billion to the U.S. Treasury and $1.7 billion to the governments of Canada and Ontario to repay loans it received in June 2009.
The repayment puts Chrysler on firmer financial ground and draws it closer to Fiat, two goals investors and bankers have said would make Chrysler more attractive in an initial public offering that could come this year or next.
The automaker said it repaid the original loans in full, more than six years ahead of schedule. Under the original terms, Chrysler had until 2017 to repay the debt.
"Paying back the loans, along with the financial community's investment in our refinancing packages, marks another step in the company returning as a competitive force in the global automotive industry," Chrysler Chief Executive Sergio Marchionne said in a statement.
In London on Tuesday, President Barack Obama called the pay back a "significant milestone" and a sign the U.S. auto industry is recovering.
Chrysler swapped out government debt with cheaper debt from institutional investors. The company does not have any less debt on its books, but it said the refinancing would save it an estimated $350 million a year in interest expenses.
Chrysler paid more than $1.2 billion in interest on its debts in 2010. Marchionne's frustration with the terms of the government loans seemed to bubble over earlier this year when he denounced them as "shyster loans.
Marchionne, who is also Fiat's CEO, was set to appear at a Chrysler assembly plant in Sterling Heights, Michigan, on Tuesday afternoon to express thanks to the governments for their financial support. Ron Bloom, the Obama administration's point man on auto restructuring, and General Holiefield, head of the United Auto Workers union's Chrysler department, were also scheduled to appear.
However, Chrysler has not completely ended government involvement. The Treasury said it continued to hold a 6.6 percent common equity stake in Chrysler, but it did not expect to fully recover its remaining outstanding investment of $1.9 billion in the automaker.
WALL STREET'S FAITH
Yet Chrysler's ability to pull off a deal at all is a sign of Wall Street's renewed faith in the company, which was nearly left for dead two years ago at the height of the financial crisis.
"When we did this deal back in 2009, we couldn't have borrowed a buck from a 7-Eleven store -- the banking system was shut," Marchionne said earlier this year.
A sharp drop in auto sales pushed the Auburn Hills, Michigan-based company to the brink of collapse in 2009 before its federal bailout.
Treasury officials were initially divided on saving the company, but ultimately decided to prop it up to preserve jobs. Chrysler emerged from bankruptcy nearly two years ago under Fiat's management.
Marchionne was a central figure in laying the groundwork for the Chrysler deal in 2009. He refused to have Fiat put up any cash for Chrysler.
Instead, the Treasury devised a series of tests that allowed Fiat to raise its stake. Over time, Fiat can increase its stake to 76 percent, according to a recent regulatory filing.
As a result of the loan repayments, Fiat's stake rose to 46 percent. This puts Fiat within striking distance of its 51 percent goal in 2011. Once Chrysler develops a vehicle that gets 40 miles per gallon on a Fiat platform -- a development expected in the fourth quarter -- Fiat can go to 51 percent.
FIAT-CHRYSLER INTEGRATION
Marchionne can also bolster Fiat's earnings by moving quickly to integrate its operations with Chrysler's, analysts said.
Chrysler generates "structurally stronger" profits than Fiat, which relies heavily on Brazil, Cheuvreux analyst Bruno Lapierre wrote in a note.
Bernstein Research analyst Max Warburton said there was little obvious commonality between Fiat's production of small cars in Italy and Poland and Chrysler's pickups in Michigan and Mexico.
"But Marchionne seems determined to make this work and is pushing the companies together far faster than any previous example of M&A," Warburton said in a May 19 research note.
Chrysler's lineup, which is heavily skewed toward pickup trucks, minivans and SUVs, remains a concern for investors at a time when pickup sales are faltering. In the first quarter, Chrysler's U.S. market share was 9.1 percent, tracking below the 10 percent goal for the year.
In addition, meeting upcoming federal fuel economy standards is expected to be a challenge for the company. Funds from the Department of Energy would help the company meet those standards.
"Chrysler is not yet fixed," Warburton said. "But it is clearly in a much better place than we could have guessed 18 months ago."
(Reporting by Ben Klayman in Detroit and Deepa Seetharaman in Chattanooga, Tennessee; editing by John Wallace and Andre Grenon)
