Is Chrysler worth -$30 billion?

The Wall Street Journal, it seems, can read my mind. No sooner do I ask

why Chrysler is going to be borrowing as much as $65 billion in new debt, than

Serena

Ng and Jason Singer do their best at answering. (Many thanks to Steve

Waldman for the heads-up.)

I can’t pretend that I really understand what’s going on, even after reading

the WSJ article, but at least the broad outlines are there. It turns out that

at the moment, some $38 billion in Chrysler debt is guaranteed by Daimler. So

Cerberus needs to raise at least that much in order that Daimler is no longer

responsible for a company it doesn’t own.

Quite why Cerberus needs to raise another $24 billion on top of that is less

clear. (The WSJ puts the total debt requirements at $62 billion.) We’re told

it’s to "fund the business," although it smells to me a little bit

like old-fashioned private-equity leveraging-up, as well.

The interesting thing is that the lion’s share of the borrowing will be done

by Chrysler Financial, not the auto company. The auto company will borrow "only"

$12 billion in total, which will make it less leveraged and more creditworthy

than either GM or Ford.

A lot of Chrysler Financial’s debt will be auto-loan securitizations:

Chrysler Financial’s expected sale of securities backed by auto loans may

be the biggest issue the $200 billion market for such debt has seen. Chrysler

has held many of those loans and now is effectively selling them by issuing

securities backed by their payments. Some analysts say the company could sell

up to $30 billion of such securities.

Let’s be conservative, and say that if Chrysler Financial’s loan portfolio

can be securitized to the tune of $30 billion, that means that the portfolio

is worth $33 billion today. Cerberus bought Chrysler Holding for $7.4 billion.

Chrysler Holding comprises Chrysler Financial and Chrysler Corp, the auto maker.

Let’s say that the value of Chrysler Financial is the value of its loan portfolio,

nothing more. And let’s say that F+C=H, where F is the value of Chrysler Financial,

C is the value of the automaker, and H is the value of the holding company that

Cerberus bought.

What do we conclude? That C, the value of the automaker, is H-F = -$26 billion.

Now in fact, Chrysler Financial is probably worth more than $33 billion, and

the holdco is probably worth less than $7 billion, since Daimler is actually

losing money on this deal. So the value of the automaker on its own might well

be a negative number well in excess of $30 billion. Or am I missing something,

here?