GM and Chrysler Will Get More Help, With Tighter Strings

Even though the automakers haven't delivered promised debt restructuring, they appear set to get billions more in taxpayer dollars
By David Welch
President Barack Obama will likely throw General Motors (GM) and a lifeline on Monday, Mar. 30. But it won't be carte blanche for either carmaker.
The Treasury Dept. previously set a deadline of Mar. 31 for Chrysler and GM to get needed concessions from the United Auto Workers union and their creditors, and show that they have strong business plans. The reasoning was that if they sufficiently cut factory costs, retiree obligations, they would be viable and worthy of more cash to get through the recession.
Neither company has met its targets. So the President and his Auto Task Force will likely promise the two companies enough cash to keep going for the next few weeks or months, but the Administration will set a firm deadline to get all restructuring done, say people familiar with the matter. GM needs—at a bare minimum—to reduce its $20 billion debt to the UAW by $10 billion, and to cut bond debt from $28 billion to about $9 billion. Chrysler also has to reduce its debts.
No Specifics Available
"There won't be any grand commitments," says David E. Cole, chairman of the Ann Arbor (Mich.)-based Center for Automotive Research, which has advised the task force. "I think they will give the company, union, and bondholders a firm deadline to get everything done or they go to Plan B. They won't like Plan B."
The Treasury Dept. isn't giving specifics on what it wants or how much assistance the government would give, but the President and his team will announce what kinds of restructuring moves and changes the carmakers need to take to continue getting the funds they have requested and avoid bankruptcy. While pushing GM and Chrysler into bankruptcy is an option if the UAW and creditors don't budge, Auto Task Force lead adviser Steven Rattner has said it's not the preferred option. "All indications are that they will provide support," says John McEleney, chairman of the National Auto Dealers Assn., who has met with the task force. "There doesn't seem to be any appetite for bankruptcy."
GM has already received $13.4 billion and wants $16.6 billion more. Chrysler has borrowed $4 billion and has asked for another $5 billion in loans. A GM spokesman declined comment and a Treasury Dept. official said only that details are coming Monday.
GM Bondholders Have Balked
GM has been negotiating with its bondholders to slash its unsecured debt by two-thirds. But bondholders have balked, asking for a bit more than one-third cash and the rest stock. They have also asked the government to guarantee the debt. In the last week, the bondholders also claimed that they hadn't had enough time at the table with GM or the Auto Task Force.
But talks have resumed recently. CNBC said Friday that GM offered bondholders 8¢ in cash, 16¢ in new unsecured debt, and new stock in GM. The bonds have traded for around 20¢ on the dollar.
Bondholders have argued that even though GM is offering more than the 20¢ that some bondholders paid, GM isn't offering to cash them out. So the company is only reducing the face value of the bonds and giving those investors equity.
GM Needs $30 billion From Uncle Sam
At the same time, GM owes the UAW $20 billion to create a union-led health-care trust for retiree medical benefits. The UAW already accepted half of a similar debt from rival Ford Motor (F) in cash. GM could get a similar deal and be compliant with the original request from the Treasury Dept., but one source familiar with the talks said that GM wants the UAW to take less than half the $20 billion in cash and the rest in stock.
GM may need to get the UAW and bondholders to accept more stock than cash than the original plan asked for. The car market has deteriorated since last year, when the Bush Administration set up the parameters for restructuring the company's balance sheet. With sales in the tank, GM needs $30 billion in government money—about the same amount of debt the company must negotiate away.
Even if the union and bondholders agree to the terms set last year, GM would still end up with well over $60 billion in debt, which is right where the company was before borrowing any government money. GM pays more than $3 billion a year in interest, and the cash payments are draining money that could go to designing and marketing new models and developing technology.
Stock Would be Wiped Out in Bankruptcy
Bondholders have been leery of taking too much stock, since its value would be wiped out in bankruptcy. But Cole notes that Chrysler stock went as low as $2 a share in 1979. That's when the government gave Chrysler a $1.5 billion loan guarantee in exchange for stock warrants. The company bought the shares back from Treasury at $21.50 in 1983, giving Uncle Sam a nice profit. If GM and Chrysler make it, Cole says, the union, bondholders and government could make out quite nicely once the car market rebounds.
The Treasury Dept. may also weigh in on whether Chrysler is a stand-alone carmaker or needs a partner. Members of the task force have met with Chrysler CEO Robert Nardelli and, reportedly, with Fiat CEO Sergio Marchionne. Chrysler has a deal to give Fiat 35% ownership of the U.S. automaker if it can restructure its debt. "The government will probably encourage a partner, whether it's Fiat or someone else," Cole says.
Beyond restructuring moves, the automakers and their dealers are hoping the Obama Administration will push greater incentives to sell cars. A "Cash-for-Clunkers" introduced by Senator Dianne Feinstein (D-Calif.), would give buyers up to $4,500 for trading in an old car for a new and more fuel-efficient one. The legislation is gaining momentum, said McEleney, chairman of the National Auto Dealers Assn. The bill has been tied up as some lawmakers want the bill to give the incentive only for American-made cars while others want it to be agnostic as to whether the cars are made in the U.S. or imported.
Junk Car Plan Worked in Germany
McEleney said he met with the Auto Task Force in early March and told its members that the current sales levels—which are running at an annualized rate of about 9 million cars, compared with 16 million or more in recent years—isn't sustainable for any car company.
A similar junked-car incentive did well for workers in Germany last month. The German government gave consumers about $3,200 if they traded in an old model for a new one. Sales in Germany rose 22% in February, while they plummeted elsewhere around Europe. That may not be part of Obama's auto industry plan that is coming Monday, but the idea "seems to have life with Congress," McEleney says. And it suits two of Obama's goals: It would help the carmakers and get old cars—which spew the dirtiest emissions—off the road.
From:Businessweek