Kirk Kerkorian's battle for control of Chrysler Corp. may have helped the company's shareholders, but it has hurt the bondholders.
Demands last week by Mr. Kerkorian for seats on the company's board of directors caused the yield spread on Chrysler's bonds relative to Treasury securities to widen again. A widening of interest rate spreads means investors perceive more risk in holding the Chrysler bonds.
And during the past year, Mr. Kerkorian's sniping at Chrysler's management for what he regards as an ultraconservative cash position - and his pressure to make the company share that cash with stockholders - has increased the volatility of the company's bonds and the uncertainty of bondholders.
Spreads on Chrysler general debt securities relative to Treasuries have widened since Jerome B. York joined Tracinda Corp. in September, giving more credibility to Mr. Kerkorian's effort to control Chrysler, bondholders and analysts said.
While yield spreads have widened on the bonds, Chrysler's stock price has risen almost $14 a share since Mr. Kerkorian began his crusade in April.
Mr. York in a letter last week to Chrysler Chairman Robert J. Eaton and in a filing with the Securities and Exchange Commission, made several demands, including for a seat for himself on the company's board of directors. Also, he asked for two other board seats for people mutually acceptable to Tracinda and Chrysler management.
In addition, Mr. York asked Chrysler for the appointment of outside directors to examine the company's cash management policy.
Also, he asked Chrysler to adopt immediately an anti-greenmail bylaw, showing the Kerkorian group is not seeking to benefit at the expense of other sharholders. Among other requests, he asked to raise Chrysler's poison pill anti-takeover threshold to 20% from 15%.
Tracinda, the company's largest shareholder, controls 14.1% of Chrysler's stock.
In response, company officials issued a statement, saying the company will give serious consideration to "any shareholder proposal designed to build long-term value." The statement noted, however, that "several of Mr. Kerkorian's proposals, including proposals to add Kerkorian nominees to the board and to increase the poison pill threshold, relate to control issues. Chrysler's board of directors will review Mr. Kerkorian's proposals and will consider the interests of Chrysler's other shareholders, which may differ from those of Kerkorian."
The statement said the board will respond to the proposals after it reviews them.
An analyst at Lehman Brothers Holdings Inc., New York, noted the volatility of the yield spread coincided with Mr. Kerkorian's moves.
The yield spread of a Chrysler bond with a 91/2% coupon interest rate maturing in 1999 widened to 67 basis points over the yield of a similar Treasury security of the closest maturity, following reports of Tracinda's request for a board seat for Mr. York and other demands, he said. The day before the bond traded at a 66 basis points, up from 59 basis points in August.
Last April, when Mr. Kerkorian made his first bid for Chrysler, the spread rose to 79 basis points, up sharply from 58 basis points in March, said the Lehman analyst. Spreads tightened somewhat after Mr. Kerkorian's initial bid failed, only to widen again with the addition of Mr. York to his team.
"Intensive pressure from shareholders is a concern for bondholders," said Scott Sprinzen, auto analyst in the corporate ratings department of Standard & Poor's Corp., New York.
Any move by the management to address shareholder concerns "is potentially problematic" for bondholders, added Gregory Bauer, senior analyst, Moody's Investors Service Inc., New York.
"If the pressure results in changes to the management policies and practices, it's a problem" for bondholders.
Carol Levenson, who has her own independent fixed-income analysis firm in Chicago and produces the daily fax report Gimme Credit, said: "The credit risk level has heightened considerably." Mr. Kerkorian, through his Tracinda Corp., "is putting together quite a credible team, but has yet to make his move. This adds to the uncertainty" among bond investors.
Safety net' could weaken
S&P's Mr. Sprinzen noted: "The company has a pretty solid safety net in place. Actions that could be taken to enhance shareholders could involve weakening that safety net."
The safety net in large part is Chrysler's cash cushion, which is about $7.5 billion.
Moody's Mr. Bauer said, "If the pressure (from shareholders) results in a change in management financial practice, it could have negative implications for bondholders."
Commenting on the shareholder pressure, a portfolio manager for a major Chrysler bondholder who asked not to be named, said: "Satisfying obligations would be a concern because of event risk. We've seen that reflected in the market already." The manager holds almost $25 million of general Chrysler bonds.
Despite the widening of the spread in Chrysler bonds over Treasury securities, which is a measure of the risk premium, Chrysler bondholders haven't taken any absolute losses. The company bond prices have risen this year as interest rates have fallen, but just not as much as Treasury securities, said the Lehman analyst.
But for shareholders, Chrysler's stock price has risen steadily this year since Mr. Kerkorian made his first bid for control last spring.
The stock, which closed at 49 Dec. 31, fell to 393/8 just before Mr. Kerkorian made a $55 a share bid for the company in mid-April. During the week of the bid, the stock shot up to 477/8, although the bid was unsuccessful. But the stock has continued to rise; the stock closed at 531/4 Oct. 25.
Four major pension and investment funds are direct investors in Chrysler debt securities of more than one-year maturity, according to CDA Spectrum BondWatch, produced by CDA Investment Technologies Inc., Rockville, Md.
The New York City Retirement System, as of Dec. 31, had $18.7 million of the bonds issued to finance Chrysler's Auburn Hills, Mich., headquarters complex and automotive plant. The Maryland State Retirement System, Baltimore, had $15 million of the Auburn Hills issue in an internally managed portfolio as of June 30. The Teachers Insurance & Annuity Association - College Retirement Equities Fund, New York, had $10 million of general Chrysler debt, as of June 30. General Electric Investment Corp., Stamford, Conn., investing for the GE S&S Long Term Interest Fund, as of Dec. 31, had $8.9 million of general Chrysler debt.
Many other pension funds, endowments and foundations hold Chrysler debt securities through external money managers.
"I'm not recommending people buy Chrysler paper at these price levels," Ms. Levenson said. "I'm recommending that the bonds are fully priced given the level of uncertainty " - regarding Mr. Kerkorian and other pressure from shareholders - "and also given that the fundamentals are turning down as well."
Standard & Poor's rates Chrysler senior debt as A-, but it has placed it as a "negative outlook," said Mr. Sprinzen. "That points to the possibility of lowering the rating" in the future, although nothing is imminent and the company isn't on the debt watch list.
Moody's rates the senior debt A3. Although it hasn't placed Chrysler on any special review, Moody's Mr. Bauer said, "It's something we are watching very carefully. Our ratings are very dependent on the continuation of the conservative financial policy of management."
The company has $12 billion in debt outstanding, all but $2 billion under Chrysler's finance company.
'Ridiculous' emphasis on cash
Mr. Sprinzen said Chrysler "has persevered with its financial strategy," in the face of the threats over control, giving bondholders some cushion. "There is so much emphasis on its cash position, it's ridiculous," he said.
Other analysts have suggested Mr. Kerkorian and some other shareholders want Chrysler to use some of the cash to increase dividends and reinvest in the company.
"But the cash is only one aspect" of management's financial strategy, Mr. Sprinzen said. Other elements include keeping a fully funded pension plan and keeping debt modest.
Moody's Mr. Bauer said Chrysler has some fundamental problems. "So Chrysler needs proportionately more cash than" General Motors Corp. and Ford Motor Co.
Among the reasons, Chrysler is overly dependent on the North American market and on light trucks, especially minivans and sport utility Jeeps.
"Ford and GM have a more diversified product line around the world" and are becoming more competitive in Chrysler's top vehicle segments of the market, Mr. Bauer added.
Any decrease in Chrysler's cash position or change in the way it has been managing its finances "will lessen the protections available and reserves the company can draw on to satisfy its obligations," Mr. Bauer added.