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Chrysler financial arm to stop leasing vehicles

July 26 12:05:01 PM, Yahoo News

Reuters - Chrysler LLC said its financing arm would stop offering vehicle leases to U.S. consumers, a sharp break in strategy in response to tighter credit and the plunging resale prices for gas-guzzling trucks.

The abrupt announcement on Friday afternoon was the latest sign of the stress on Chrysler from an industry downturn that has hit all automakers. Earlier this week, Chrysler said it would cut 1,000 white-collar jobs by the end of September.

"We are shifting our strategy to focus on retail products," said spokesman Bill Porter on Friday. "Effective August 1, we will no longer offer lease products in the United States."

Porter said the move by the unit of the No. 3 U.S. automaker, which is controlled by private equity firm Cerberus Capital Management (CBS.UL), was prompted by the tough market.

U.S. auto sales have dropped to their lowest level in 15 years, and the sudden premium on fuel-efficiency in the face of record gasoline prices has forced consumers to abandon SUVs and other light trucks.

The result has been a sharp decline in the resale prices for light trucks that has forced major automakers and related lenders to take large losses to write down the value of leases on those once-popular vehicles.

"You have got the dropping of the used car vehicle prices. You have got people that are struggling with the credit crunch," Porter said. "It is very difficult right now to offer competitive lease products. So we are switching our strategy."

Chrysler's larger rival Ford Motor Co (F.N) this week took a $2.1 billion charge for its finance company when it reported second-quarter results, in large part because of the hit it took on the declining value of SUV and truck leases.

Cerberus also owns a 51 percent stake in GMAC, the former captive finance company for General Motors Corp (GM.N).

GMAC spokeswoman Gina Proia declined to comment on Chrysler's announcement or on whether the lender would follow Ford in writing off vehicle loans on its books.

While the move by Chrysler Financial could protect its balance sheet from a further drop in used-car values, it also risked becoming a further drag on already sluggish vehicle sales by its automotive partner Chrysler.

Chrysler, which has seen its sales drop 22 percent in the first half, relies more heavily on sales of light trucks than its rivals and it has been the most aggressive in discounting.

The announcement of the Chrysler Financial move to stop financing leases came as the automaker extended a zero-percent financing for up to 72 months on some of its key larger vehicles such as the Dodge Aspen, Jeep Grand Cherokee and Commander.

Chrysler said its dealers would be given incentives but would have to find independent finance companies for lease financing.

Alan Helfman, a dealer at Helfman River Oaks Chrysler Jeep in Houston, Texas, said he was reassured that some of the local banks would finance his lease customers.

Even so, he said, the news from Chrysler had been a shock, since it represented such a potentially disruptive break with the way sales have been made for years.

"When I first got the news I was hoping that I could have had a second floor on the dealership so I could jump," he said, adding that he had relaxed after talking to local bankers.

U.S. automakers are not the only ones that have been hit by the slump in SUV and pickup truck resale values.

Nissan Motor Co Ltd (7201.T) Chief Executive Carlos Ghosn said this week that the reserves needed to cover losses on vehicle leases had been the one major surprise of the downturn for the Japanese automaker.

(Reporting by Poornima Gupta, writing by Kevin Krolicki editing by Phil Berlowitz, Gerald E. McCormick and Gunna Dickson)

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