GM and Chrysler Will Get $13.4 Billion in U.S. Loans (Update10)
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By Roger Runningen and John Hughes
Dec. 19 (Bloomberg) -- General Motors Corp. and Chrysler LLC will get
$13.4 billion in emergency government loans in exchange for
substantially restructuring their businesses, President George W. Bush
announced.
Another $4 billion will be available to GM in February provided
Congress releases the second half of the $700 billion Troubled Asset
Relief Program fund originally set up to bail out financial
institutions. The automakers have until March 31 to meet the
conditions of the loans, including demonstrating they have a plan to
become profitable, or be forced to repay.
Winning the assistance is a reprieve for GM, the biggest U.S.
automaker, and No. 3 Chrysler after they said they would run out of
operating funds as soon as this month. Bush is stepping in after
Senate Republicans' refusal last week to take up a House- approved
rescue raised the prospect that the companies would fail, costing
millions of jobs.
"These are not ordinary circumstances," Bush said at the White House
today. "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 cost of letting automakers fail would lead to a 1 percent
reduction in the growth of the U.S. economy and mean about 1.1 million
workers would lose their jobs, including those in the auto supply
business and among dealers, the White House said in a fact sheet.
'Necessary Step'
President-elect Barack Obama endorsed the plan, calling it in a
statement a "necessary step" to avoid a major blow to the economy.
"I do want to emphasize to the Big Three automakers and their
executives that the American people's patience is running out," Obama
said later at a news conference. "They're going to have to make some
hard choices."
The United Auto Workers are "disappointed" that Bush added "unfair
conditions singling out workers," the union's president, Ronald
Gettelfinger, said in a statement.
"We will work with the Obama administration and the new Congress to
ensure that these unfair conditions are removed," Gettelfinger said.
GM is reeling from almost $73 billion in losses since 2004 and a 22
percent slump in U.S. sales this year, while the drop at Auburn Hills,
Michigan-based Chrysler is 28 percent, the steepest among the major
automakers.
The package is intended for GM and Chrysler initially. Ford Motor Co.,
the second-biggest U.S. automaker, has said it can continue operating
without aid for now.
Loan Term
The loan term is three years. GM would get $4 billion by Dec. 29 and
$5.4 billion by Jan. 16. Chrysler would get $4 billion by Dec. 29. GM
would get another $4 billion by Feb. 17, provided Congress releases
the TARP funds.
Under the terms of the plan, the government's debt would have priority
over any other creditors. The automakers also must provide warrants
for non-voting stock, accept limits on executive pay, and give the
government access to financial records.
No dividends may be issued until the loans are repaid. In addition,
the automakers must cut their debt by two-thirds in an equity
exchange.
For workers, GM and Chrysler would be required to make half of the
payments to a union retirement fund in equity and eliminate a program
that pays union workers when they don't have work. Unions and
management would have to negotiate a plan to have compensation and
work rules in place by Dec. 31, 2009, that will make the U.S.
companies competitive with foreign automakers. The requirements could
be modified by negotiations with the union and debt holders.
5 Percent
GM and Chrysler will pay at least 5 percent on the loans, and would
pay 3 percentage points over the London interbank offered rate should
Libor exceed 2 percent.
The average cost of loans to high-risk, high-yield companies in
dollars is a premium of 10.5 percentage points more than Libor,
according to Standard & Poor's Leveraged Commentary and Data unit.
GM shares rose 83 cents, or 22.7 percent, to close at $4.49 in New
York Stock Exchange composite trading. Ford rose 11 cents, or 3.9
percent, to $2.95. Before today, the companies' shares had tumbled 85
percent and 58 percent this year.
Cerberus Capital Management LP, the New York-based buyout firm that
owns Chrysler, said today it will hand over equity in the company's
automotive operations to labor and creditors as part of the loan
agreement. "Concessions by all relevant constituencies" are needed to
restructure Chrysler, Cerberus said in an e-mailed statement.
Plan Criticisms
The plan "unfortunately singles out workers and clearly puts them at a
disadvantage before negotiations have even begun," House Speaker Nancy
Pelosi, a California Democrat, said in a statement.
Republican Senator John McCain of Arizona, his party's presidential
nominee this year, said he regretted that the president decided to
"give away" $17 billion to the automakers "while failing to receive
any serious concessions from the industry."
Senator Bob Corker, a Tennessee Republican, said the agreement is
"open to interpretation" and that he hopes the Obama administration
"has the will to enforce tough concessions." He added in a statement,
"The best solution would have been definite terms."
The conditions are largely those set out in the legislation passed by
the House and blocked in the Senate.
Foreign Companies
Representative Barney Frank, a Massachusetts Democrat who helped craft
the House plan, said in an interview that "it's outrageous to be
giving foreign companies the right to set wages for American workers."
The plan otherwise was mostly what was negotiated in the House, Frank said.
Democratic Senator Carl Levin of Michigan said the plan "gives the
industry breathing room." In a conference call with reporters, he said
Bush was wise to set the automakers' restructuring targets "as
non-binding goals which are subject to negotiations."
"We've got a huge amount of work to do over the next 90 days and
beyond," GM Chief Executive Officer Rick Wagoner said at a Detroit
news conference.
"Chrysler is committed to meeting these requirements," the company's
chief executive officer, Bob Nardelli, said in a statement.
The government rejected letting the companies go bankrupt, as had been
urged by some lawmakers opposed to a bailout.
'Weak Job Market'
Bankruptcy would "worsen a weak job market and exacerbate the
financial crisis," Bush said. "It could send our suffering economy
into a deeper and longer recession."
The terms of the loans represent a major challenge for the automakers,
Maryann Keller, an independent auto analyst and consultant in
Greenwich, Connecticut, said in a Bloomberg Television interview.
"The restructuring they're going to have to go through will be huge,"
Keller said. "I can't see a way for GM to operate properly with the
capital structure they have."
Joel Kaplan, Bush's deputy chief of staff, said representatives of
Obama, who takes office Jan. 20, have been kept informed of the
administration's actions.
The Treasury secretary would in effect be a "car czar," making sure
the automakers meet deadlines and having the authority to revoke the
loans, Kaplan said. The Bush administration didn't want to designate
an independent overseer with a month left in office.
Kaplan, asked whether Chrysler should merge with GM, sidestepped the question.
"We are not going to tell the manufacturers what the right structure
is for them to be viable; we're just going to tell them that if you
want taxpayers' assistance, you're going to have to make those
decisions, and you're going to have to prove it," he said.
Treasury will need to go to Congress to get the remaining $350 billion
in TARP funds released, including the $4 billion in additional loans
to the automakers, Kaplan said. That may be left for Obama's
administration, he said.
To contact the reporters on this story: Roger Runningen in Washington
at rrunningen@bloomberg.net; John Hughes in Washington at
Jhughes5@bloomberg.net
Last Updated: December 19, 2008 17:21 EST
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