U.S. to lend $1.5 billion to Chrysler Financial

WASHINGTON (Reuters) - The U.S. Treasury on Friday agreed to lend Chrysler LLC's finance arm $1.5 billion for five years to fund new car loans and boost sales for the sputtering Detroit automaker.

Chrysler Financial, the finance arm of the No. 3 U.S. automaker, responded by immediately rolling out a zero percent financing offer on a range of Chrysler vehicles.

In a related development, Ford Motor Co. said its finance unit was in talks with the Treasury to help unfreeze consumer credit markets, but was not asking for a handout from a government rescue fund.

"We are not seeking short-term financial assistance for our automotive operations from the government," Ford said in a statement.

Ford had previously said it would pursue a reserve $9 billion line of credit from the U.S. government if the economy significantly weakened. The Treasury has already agreed to loan up to $13.4 billion to General Motors' and $4 billion to Chrysler's auto operations from its $700 billion Troubled Asset Relief Program.

Chrysler's December sales collapsed by 53 percent amid a deepening recession and as frozen asset-backed securities markets made it impossible for potential buyers with lower credit scores to get loans.

The Treasury put an initial $100 million loan payment in Chrysler Financial's hands on Friday.

Chrysler Vice Chairman Jim Press told reporters in Detroit that the zero percent financing offer could boost sales by 20 percent from recently depressed levels, and more incentives will be rolled out in coming days.

He said Chrysler, which is owned by private equity firm Cerberus ,was making "good progress" on $3 billion in additional loans that it requested from the government for its automotive operations.

TAXPAYER PROTECTION FROM BANKRUPTCY

Chrysler Financial is creating a special purpose unit for the Treasury loan, which will be secured by new auto loans that the firm originates, and ultimately, the vehicles they finance. The structure aims to protect taxpayers in the event that the firm files for bankruptcy by separating the collateral from the firm's other assets, a U.S. government official said.

Treasury last month invested $6 billion to support activities of GMAC, the financing arm affiliated with GM.

The government is bolstering the finance companies to spur auto loans to consumers, whose purchasing power has been slowed due to the credit crunch and recession. Most U.S. car buyers finance their auto purchases.

Automakers have blamed tight credit as a major factor behind the 18 percent drop in industry-wide U.S. auto sales in 2008. Analysts expect the downturn to continue this year, driving sales of new cars and trucks to their lowest level since the early 1980s.

New vehicle sales represent some 20 percent of U.S. retail sales and are tracked as an early indicator of the strength of consumer demand.

By extending the $1.5 billion loan to Chrysler Financial, the Treasury has now bailed out three firms controlled by Cerberus, including Chrysler and GMAC. Cerberus has an 80 percent stake in Chrysler and a 51 percent stake in GMAC.

Chrysler is considered the weakest of the Detroit manufacturers and analysts have questioned whether it can survive without a merger partner.

Chrysler burned through $9 billion in the second half of last year to end 2008 with $2 billion in cash.

Chrysler's sales fell 30 percent in 2008 and it shut down all its manufacturing facilities for a month at the start of this year to shore up cash and cut inventories of unsold vehicles.

(Additional reporting by John Crawley in Washington and Poornima Gupta and Kevin Krolicki in Detroit; Editing by Leslie Adler)

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