GM, Chrysler Get a Lifeline
By Brendan Moore
By now you have read that the federal government (read: the Bush Administration) acted to give some short-term aid in the form of loans to General Motors and Chrysler early today so that the automakers would not collapse.
It is a 17.4 billion dollar (USD) bailout.
Ford did not ask for aid at this time.
This has a produced a good news-bad news scenario for the two automakers.
The good news, of course, is that they won’t run out of money in a few weeks and have to shut down. They now live to fight another day.
The bad news is that the federal government now can tell them what to do whenever it suits them, starting with some very tough loan conditions in the first few months.
These are the terms from a “fact sheet” released by the Bush Administration this morning.
Fact Sheet: Financing Assistance to Facilitate the Restructuring of Automobile Manufacturers to Attain Financial Viability
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 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.
So, very tough terms. And the UAW has already stated publicly that they are not willing to change their overall wage structure until 2010, so that is a pretty big problem in terms of the conditions set by the administration.
If the conditions listed are not met by March 31, the administration (the future Obama administration) has the right to call in the loans, which will mean certain death for GM and Chrysler in this current economic environment.
It is difficult to predict just how closely the Obama administration will hew to the term the Bush administration demanded of the automakers. Many of the difficult decisions regarding the auto industry bailout will have to be made by the Obama administration, not the soon-to-be-departed Bush Administration.
The biggest winner in all of this, at least for the short-term is Ford. Any benefits that accrue to GM and Chrysler as they meet the various conditions imposed for their loans will undoubtedly ripple out to Ford. And Ford does not have to open their books or cede control to the federal government.
Ford has enough money to operate; the reason they do is because Alan Mulally mortgaged everything in sight when he came on as CEO of Ford a couple of years ago, and then put that money in the bank. Frankly, Mulally looks like nothing short of a genius at this point as he not only made sure Ford had enough money for this downturn, he also firmly pointed Ford towards small vehicles before the carnage in the economy, thus giving Ford a considerable head start over GM and Chrysler in terms of changing strategic direction.
Not to say that Ford is in great shape – they’re not. They’re still walking the razor’s edge, just like some other manufacturers. But they look pretty good compared to GM and Chrylser.
There is plenty of criticism of today’s bailout from different sources; many critics claim that all it did was delay the inevitable failure of the companies, that no matter what GM and Chrysler do, they won’t be able to compete effectively in the auto marketplace.
But President Bush brushed aside those competing voices and approved the bailout. “In the midst of a financial crisis…allowing the U.S. auto industry to collapse is not a responsible course of action,” Mr. Bush said.
“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 auto makers from going out of business,” the president stated. “But these are not ordinary circumstances.”
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