Banks led by JPMorgan Chase yesterday abandoned plans to syndicate $12 billion (£5.8 billion) of loans to Cerberus to help the firm to finance its leveraged buyout of Chrysler.

The banks, which also include Goldman Sachs, Morgan Stanley and Bear Stearns, halted the debt offering after growing losses on sub-prime mortgages made investors increasingly nervous about high-risk leveraged buyouts and they balked.

Cerberus’s takeover of Chrysler was agreed in May, before the extent of the escalating credit crunch came to light. As such, the banks had happily agreed to underwrite the debt because they were confident that they could easily syndicate it after several years of easy credit.

However, demand for buyout-related debt has plummeted in recent weeks, and the banks have been forced to hold the unsyndicated loans on their books. This could put a dent in their profits if Chrysler’s troubles continue and the carmaker is unable to meet its interest repayments.

Under the alternative financing agreed by the banks yesterday, they will assume $10 billion of the $12 billion loan they were attempting to syndicate. DaimlerChrysler, which retained a 19.9 per cent stake in the group after its sale, will buy the remaining $2 billion.

Chrysler’s bankers are still expecting, separately, to raise another $8 billion in loans for Chrysler’s profitable finance unit, of which $6 billion is likely to be sold this week. However, they have been forced to raise the interest on those loans for a second time.

Cerberus said it expected to close its $7.4 billion acquisition of Chrysler in the current quarter as planned.

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