C Citigroup Inc

Cerberus Capital Management LP is planning a revival of Chrysler Financial, the auto lender whose core business was effectively dissolved by the U.S. Treasury.

Chrysler Financial, owned by the secretive private-equity giant and no longer affiliated with the auto maker whose name it bears, plans to lend to mid-sized firms unable to tap banks and public debt markets, according to people with knowledge of the situation. It will also extend retail auto loans and leases on new and used vehicles to borrowers with less-than-stellar credit.

The strategy heralds the return of New York-based Cerberus to auto lending. Cerberus, run by deal maker Steve Feinberg, owns a stable of financial institutions and was the biggest auto lender in the nation before the financial crisis hit. Its investments in car maker Chrysler LLC and auto lender Ally Financial Inc., then known as GMAC LLC, were largely wiped out and the companies were bailed out with billions of dollars in government aid.

Cerberus maintained its 100% ownership in Chrysler Financial. And with the new moves, Cerberus hopes to successfully extend a blueprint it has used in other businesses: Lending to borrowers shut out from bank financing.

Chrysler Financial's planned focus on mid-sized businesses comes at a time when many banks are abandoning these customers. Loans to middle-market businesses totaled $4.3 billion in 2009, down from $34.2 billion in 2006, according to Standard & Poor's LCD.

Chrysler Financial is setting up a new division--tentatively named Greenstar Capital Finance LLC--to lend to mid-sized firms, say the people with knowledge of the situation. Greenstar will be the face of Chrysler Financial and make the majority of its loans. The lender's legacy assets--loans to Chrysler customers--continue to wind down as they run off the lender's books.

Chrysler Financial chief executive Tom Gilman recruited two executives, Tim Fording and Seth Fink, from Ableco Finance LLC, a specialty finance lender controlled by Cerberus, to set up and run Greenstar, say people with knowledge of the matter. At Ableco, Fording and Fink specialized in lending to middle-market firms.

Gilman, Fording and Fink declined to comment through a Chrysler Financial spokeswoman.

The auto lending business may take on the Greenstar name or have a different one. It will focus on retail loans and leases for new and used vehicles for "near-prime" borrowers, and it won't be focused specifically on Chrysler customers but customers of all auto makers.

Near-prime borrowers are those with FICO credit scores of 620 to 679, according to CNW Marketing Research Inc., a research firm based in Bandon, Ore.; prime borrowers have scores of 680 or higher. Near-prime customers made up 10.55% of new vehicle sales in 2009, down from 12.87% in 2008, according to CNW. During the same period, near-prime customers for used vehicles totaled 30%, down from 53.1% in 2008. In contrast, customers with prime credit made up 83.77% of new vehicle sales in 2009, up from 79.74% in 2008.

In 2007, Cerberus paid $7.4 billion for about 80% of Chrysler. It relinquished its equity in the company in the auto maker's government-orchestrated bankruptcy filing last year. Cerberus acquired both Chrysler and its finance arm, which were sold separately by its then-parent, Daimler AG. (DAI.XE)

A Cerberus-led investor group bought a 51% stake of what was GMAC from General Motors (GM) in 2006. As a condition of the auto lender becoming a bank-holding company at the end of 2008, Cerberus scaled back its ownership to 14.9%.

When the Obama administration bailed out Ally--now majority-owned by the U.S. government--it made it the main lender to both Chrysler and GM dealers and customers. The move effectively eliminated new lending at Chrysler Financial's auto lending business at the time.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

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