The GM and Chrysler Bailout: Approved

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December 19, 2008


With GM and Chrysler in dire need of cash, President Bush announced a little after 9:00 this morning a bailout for both auto companies. The President said given the current state of the auto industry a disorderly failure was not an option given the potential fallout to the already fragile US economy. Under normal economic conditions, the President would have preferred a Chapter 11 bankruptcy restructuring.

Blame was also placed on Congress for not acting earlier and as a result the President will allocate money from the Troubled Asset Relief Program (TARP) to prevent a collapse of the industry.

The auto companies will get 3-months to develop and present plans to restructure. If not, the loans will be called and the companies will face certain bankruptcy. All stakeholder including management, suppliers, labor and debt holders will be called to make concessions. Specifically, bond holder debt will be converted to equity in the companies and labor unions must reach cost parity with foreign transplants.

Afterwards the specifics of the plan were released. The government will make available $17.4 billion in loans to the automakers and will allow GM and Chrysler to access the money immediately. $13.4 billion will be made available in December and January from the $700 billion TARP fund.


The Terms of the Loan (Source: White House Press Release):

Purpose: The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing.

Amount: Auto manufacturers will be provided with $13.4 B in short-term financing from the TARP, with an additional $4 B available in February, contingent upon drawing down the second tranche of TARP funds.


Viability Requirement: 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.


Definition of Viability: 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.

Binding Terms and Conditions: 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.

Targets : 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 December 31,2009.

• Wages that are competitive with those of transplant auto manufacturers by December 31,2009.


Analysis:

Without covering old ground in depth, I am very satisfied with the terms of the loan agreement and believe if specifically GM can deliver on the targets outlined, and assuming the greater economy holds out, there is a good chance they can rectify their balance sheet. The conditions will allow GM to make the fundamental changes to its cost structure it otherwise could not have done without filing for bankruptcy. In many ways this has been the worst 6-months in the history of General Motors, but the conditions of the bailout should prove to be the best thing that has happened to the company in the past 30-years.

I am also very pleased "game changing" concession will have to be made by the auto workers union (UAW). For years the UAW has prevented the US auto companies from getting a competitive labor agreement with the non-UAW foreign transplants. Assuming this comes to fruition, the playing field as far a labor cost (including legacy cost) should be finally level (Heritage Foundation Report). It is hoped that any agreement between GM/Chrysler and the UAW is carried over to Ford since it is not expected they will be accepting Federal aid and would not be subject to the conditions of the loan. Finally, I am still not exactly sure where this leaves Chrysler. Even with the $4 billion Federal loan, I do not believe they can survive and will continue to wait for Cerberus' exit strategy which should be well known by March 31, 2009. (see: The Beginning of the End: GM-Chrysler Merger Talks Resume)


 

Additional Resources:

GM Loan Terms

Chrysler Loan Terms (See page 15-Cerberus maybe on the hook for the Chrysler LLC loan)

UAW to ask Obama to reverse 'unfair' loan conditions, Reuters, 2008

 

 

 

 

 

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