NEW YORK, May 16 (RLPC) - Chrysler Group LLC is widely expected to downsize and raise pricing on its $3.5 billion institutional loan ahead of its commitment deadline on May 18, sources said on Monday.

The company is sounding out potential investors in the loan portion of its $6 billion refinancing package at increased pricing of 450-500 basis points over Libor.

Chrysler was unavailable to comment by press time. The term loan is part of a refinancing package that will be used to repay $7 billion in government loans stemming from its 2009 bailout.

The loan is likely to maintain a 1.25 percent Libor floor and a 99-99.5 OID, according to sources.

In addition, the company is expected to downsize the loan by $500 million and increase its concurrent second-lien bond sale by the same amount. The size of the note sale is currently $2.5 billion.

Changes could also be made to the 101 soft call provision.

Morgan Stanley is leading the $3.5 billion term loan that launched on May 4 at 400-425 basis points over Libor with a 1.25 percent Libor floor, along with a discount of 99 to 99.5 cents on the dollar. It included 101 soft call in year one.

However, during the syndication process on the loan it became clear that, to attract investors, the company would have to increase the relative value of the loan vis-a-vis the bond, sources close to the transaction said.

The bonds are currently whispered in the high 7-8 percent range while the expected yield at launch on the loan was approximately 5.5-5.75 percent, according to investors.

Market participants said the sluggish appetite for the bank debt stemmed from the facility's large size and prevailing questions regarding the company's business prospects.

The checkered history of the company combined with a pickup in new leveraged loans that launched for syndication in recent days, which has made more bank loan deals available to investors, also contributed to the slow response, investors said.

In a market like this, trading sideways and with so much supply, people can afford to be choosy, especially when it comes down to a name where you have lost money before, an investor said.

Market participants agree the strength in the bond market would be the main driver behind the changes in structure. Last Thursday, Jaguar Land Rover priced a 1 billion GBP-equivalent 3-part bond deal that was significantly oversubscribed. Another 20 high yield deals priced last week, the third busiest of the year to date, to raise $10.4 billion in proceeds.

High yield volume for the first two weeks of May stands at $19 billion, which is a faster pace than the all-time record of $34.4 billion set in March 2010, according to Loan Pricing Corp data.

Including Chrysler there are another 17 deals in the pipeline this week totaling about $11 billion as issuer look to take advantage of record-low yields.

The automaker launched on May 4 the term loan and a $1.5 billion revolving line of credit. Bank of America Merrill Lynch is leading the bonds.

Other top lenders on the loan are Bank of America Merrill Lynch, Citigroup and Goldman Sachs. Citigroup is leading the revolving credit.

Concurrently with the term loan the company syndicated a US$1.5 billion revolver that is understood to be fully subscribed at the same pricing of the term loan despite some participants raised concerns about the absence of a Libor floor.

Top banks on the revolver include lead arranger Citigroup together with Morgan Stanley, Bank of America and Goldman Sachs. Each of the banks will hold on to $200 million of the loan.

Lenders in the revolver also include Barclays Capital, Deutsche Bank, UBS, RBC and Banca IMI -- the investment banking arm of IntesaSanPaolo -- that are also co-managers of the bond.

The company will also funnel $1.27 billion in cash from Fiat to pay down the remaining debt, sources said. Fiat, which currently owns 30 percent of Chrysler, has said it plans to purchase an additional 16 percent stake in the U.S. automaker for $1.27 billion.

Goldman Sachs is Chrysler's financial adviser.

Repaying the debt owed to the U.S. and Canadian governments would mark a critical step for Chrysler as the automaker tries to distance itself from the controversial rescue by the Obama administration and rebuild consumer confidence in the brand.

(Reporting by Reuters Loan Pricing Corp reporters Leela Parker and Michelle Sierra)

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