DRAFT - Auto Industry Financing and Restructuring Act

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December 9, 2008

Congressional negotiators submitted a draft version of the Auto Industry Financing and Restructuring Act to the President yesterday for consideration. What was presented establishes the framework intended to restructure the US auto companies as part of the request for Federal funds by GM, Ford and Chrysler at the Congressional hearings last week. The legislation appears to be heading toward a formal vote in Congress with an expected approval by the President. A Senate vote on the bill can come as early as today.  The auto companies requested over $30 billion in Federal aid as part of viability plans submitted to Congress. GM and Chrysler require immediate assistance if both companies are going to survive the rest of the year. Ford has access to a line of credit and is not in dire need of liquidity.

A summary of the draft legislation is presented below:

Presidential designation.

The President shall designate 1 or more officers from the Executive Branch to carry out the purposes of the Act. Additional expertise as the President believes appropriate including other Federal agencies.

Bridge financing.

The President’s designee shall authorize and direct the disbursement of bridge loans or enter into commitments for lines of credit to each automobile manufacturer that submitted a plan to the Congress on December 2, 2008 (GM, Ford and Chrysler). The President’s designee shall authorize financial assistance to each eligible automobile manufacturer in an amount that is intended to facilitate the continued operations of the eligible automobile manufacturer and to prevent the failure. Funding will come from money previously authorized by the Energy Independence and Security Act of 2007.

Restructuring progress assessment.

Not later than January 1, 2009, the President’s designee shall determine appropriate measures for assessing the progress of each eligible automobile manufacturer toward transforming the plan submitted by such manufacturer to the Congress on December 2, 2008, into a long-term restructuring plan. A review of each company’s progress toward the goals in the plan shall be conducted every 45 days.

Submission of plans.

The President’s designee shall seek to facilitate agreement on any long-term restructuring plan negotiated and agreed to by representatives of all interested parties including: employees and retirees, trade unions, creditors, suppliers, dealers and shareholder.

Long-term financing.

Upon approval of a long-term restructuring plan of an eligible automobile manufacturer, the President’s designee may provide long-term financial assistance to such eligible automobile manufacturer to implement such plan.

Allocation.

The President’s designee shall prioritize allocation of funds by, (1) the necessity of the financial assistance for the continued operation of the eligible automobile manufacturer; (2) the potential impact of the failure of the eligible automobile manufacturer on the United States economy; and (3) the ability to utilize the financial assistance optimally to satisfy the operational and long-term restructuring requirements of the eligible automobile manufacturer.

Terms and conditions.

The annual rate of interest for a loan shall be — (1) 5 percent during the 5-year period beginning on the date on which the President’s designee disburses the loan; and (2) 9 percent after the end of the period. Recipients of the funds must inform the President’s designee of large asset sales for approval and full information access including responding timely to any information requests.

Taxpayer protection.

The President’s designee may not provide financing, unless the President’s designee receives from the eligible automobile manufacturer — the securities of which are traded on a national securities exchange, a warrant giving the right to the President’s designee to receive nonvoting common stock or preferred stock in such eligible automobile manufacturer, or voting stock, with respect to which the President’s designee agrees not to exercise voting power.

  • WARRANT PRICE. — The exercise price on a warrant or other instrument shall be the 15-day average of the market price of the common stock as determined by the President’s designee prior to December 2, 2008.
  • EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE. — The President’s designee shall require any eligible automobile manufacturer which received any financial assistance to meet appropriate standards for executive compensation and corporate governance. This includes limits on executive compensation prohibits bonuses and golden parachutes.
  • PROHIBITION ON PAYMENT OF DIVIDENDS.— No dividends or distributions of any kind, or the economic equivalent thereof, may be paid by any eligible automobile manufacturer.

Other provisions were placed in the draft legislation such as granting authority to the General Accounting Office as an independent watch dog, reporting directly to congress on the progress of the restructuring at the companies receiving assistance. Also included was a provision that manufacturers would be required to conduct an analysis into the potential of converting excess sport untility vehicle capacity into bus and rail car production for public transit agencies.

Assessment:

The allocation of money appears will come initially from funds previously appropriated for the manufacturers to comply with the new fuel economy requirement enacted in 2007 and dispersed on a prioritized basis. GM and Chrysler should be able to access the loan first.

There also appears to be the possibility Chrysler might not be given a significant amount of money or at all because of the allocation criteria established in the draft. Based upon their plan presented to Congress last week, GM could require most of the funds and since it posses a greater risk to the overall US economy if it fails, should be given priority. The fine print could pave the way for the eventual absorption of select Chrysler’s assets into GM or liquidation.

The President is also directed to designate a supervisor to oversee the restructuring of any company that receives Federal funds. I applaud this written into the draft including the blanket authority to bring all invested parties together to mediate concessions.

House Speaker Nancy Pelosi recently iterated, for companies to receive Federal money, management, labor, bondholders, dealers and other stakeholders will have to make serious concessions. Much of this I discussed last week (The Senate Auto Industry Bailout Hearing - Round II).

She said:

"We call this the barbershop ... Everybody's getting a haircut here, in terms of the conditions of the bill."

Overall, the draft legislation provides a sound framework to help correct the fundamental problems with the industry and in particular GM, also providing protection for the tax payers and Congress. GM’s legacy costs need to be resolved once and for all and I believe this structure will allow the company a Chapter 11 like restructuring without the stigma. I also believe Chrysler will be given a near term life line (March 31, 2009) until the next Administration can determine its future. It is hoped that any concessions GM receives from the UAW are carried over to Ford as the playing field needs to remain level if the company does not participate in the bailout funds in the future. The draft legislation if enacted as is, does not appear to dictate policy at the companies that receive aid but grants flexibility with significant oversight to those that do.

 

Entire contents © 2008 The Automotive Lyceum All Rights Reserved

 

 



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