Issue: Dec 2008


White House Announces Short-Term Auto Company Loans



by John Larkin

 
President Bush has announced short-term financing will be made available to GM and Chrysler in order to stave off bankruptcy.

In his announcement President Bush stated, “This is a difficult situation that involves fundamental questions about the proper role of government. On the one hand, government has a responsibility not to undermine the private enterprise system. On the other hand, government has a responsibility to safeguard the broader health and stability of our economy.

“Addressing the challenges in the auto industry requires us to balance these two responsibilities. If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay -- and I would not favor intervening to prevent the automakers from going out of business.

“But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action. The question is how we can best give it a chance to succeed. Some argue the wisest path is to allow the auto companies to reorganize through Chapter 11 provisions of our bankruptcy laws -- and provide federal loans to keep them operating while they try to restructure under the supervision of a bankruptcy court. But given the current state of the auto industry and the economy, Chapter 11 is unlikely to work for American automakers at this time.“

The President remarked further, “These loans will provide help in two ways. First, they will give automakers three months to put in place plans to restructure into viable companies -- which we believe they are capable of doing. Second, if restructuring cannot be accomplished outside of bankruptcy, the loans will provide time for companies to make the legal and financial preparations necessary for an orderly Chapter 11 process that offers a better prospect of long-term success -- and gives consumers confidence that they can continue to buy American cars.”

Ford President and CEO Alan Mulally said, “As we told Congress, Ford is in a different position. We do not face a near-term liquidity issue, and we are not seeking short-term financial assistance from the government. But all of us at Ford appreciate the prudent step the Administration has taken to address the near-term liquidity issues of GM and Chrysler. The U.S. auto industry is highly interdependent, and a failure of one of our competitors would have a ripple effect that could jeopardize millions of jobs and further damage the already weakened U.S. economy.”

Ford continues to seek access to a line of credit of up to $9 billion in bridge financing, but reiterated that it hopes to complete its transformation without accessing a government loan.

Chrysler Chairman and CEO Bob Nardelli stated, “A letter of intent was signed which outlines the specific requirements that must be achieved. These requirements will require consideration from all constituents, requiring commitment first in principal, leading to implementation this coming year. Chrysler is committed to meeting these requirements."

Nardelli said the Company would remain focused on its challenge and this initial injection of working capital would help bridge the liquidity crisis the industry is facing and assist in helping return Chrysler to profitability.The Auto manufacturers will be provided with $13.4 B in short-term financing from the Troubled Asset Relief Program (TARP), with an additional $4 B available in February.

According to the White House, the firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.

A firm will only be deemed viable if it has a positive net present value, taking into account all current and future costs, and can fully repay the government loan.

The binding terms and conditions established by the Treasury will mirror those that were voted favorably by a majority of both Houses of Congress, including:

Firms must provide warrants for non-voting stock. 

Firms must accept limits on executive compensation and eliminate perks such as corporate jets. 

Debt owed to the government would be senior to other debts, to the extent permitted by law. 

Firms must allow the government to examine their books and records. 

Firms must report and the government has the power to block any large transactions (> $100 M). 

Firms must comply with applicable Federal fuel efficiency and emissions requirements. 

Firms must not issue new dividends while they owe government debt. 

The terms and conditions established by Treasury will include additional targets that were the subject of Congressional negotiations but did not come to a vote, including:

Reduce debts by 2/3 via a debt for equity exchange. 

Make one-half of VEBA payments in the form of stock. 

Eliminate the jobs bank. 

Work rules that are competitive with transplant auto manufacturers by 12/31/09. 

Wages that are competitive with those of transplant auto manufacturers by 12/31/09. 

These terms and conditions would be non-binding in the sense that negotiations can deviate from the quantitative targets above, providing that the firm reports the reasons for these deviations and makes the business case to achieve long-term viability in spite of the deviations.

In addition, the firm will be required to conclude new agreements with its other major stakeholders, including dealers and suppliers, by March 31, 2009.



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