Bailing out General Motors
Filed in archive strategy by leon on October 28, 2008
Yesterday, I did a blog entry looking at how all these failed companies were lining up at the trough to get some of the $700 billion Paulson bailout package.
Now, The Wall Street Journal tells us that the Bush administration is working to facilitate loans to General Motors from the loans Congress approved for the auto industry. That would speed up the ill-conceived merger with that other auto industry cripple, Chrysler.
Deborah Solomon and Stephen Power from the WSJ write: "Bush administration is working to release to General Motors Corp. a portion of the loans Congress approved for the auto industry, according to a person familiar with the matter, a move that could help ease the way for the company's discussed merger with Chrysler LLC.
"GM and Chrysler's majority owner, Cerberus Capital Management LP, have been negotiating a complex deal in which GM would end up owning its smaller Detroit rival, but the parties have struggled to line up financing. The combined entity would need about $10 billion in new equity to cover the cost of laying off workers, closing plants and integrating the two companies, say people involved in the talks.
The government loan, which may total around $5 billion, would come from the $25 billion in low-interest loans approved by Congress and being administered by the Energy Department. The funds are aimed at helping Detroit retool plants to meet new fuel-efficiency standards. It isn't clear how quickly the money could be made available or whether it would come with strings.
"Although the loans are supposed to speed the availability of fuel-saving technologies, the money could help steady GM's finances and make it easier for the struggling auto giant and Cerberus to persuade investors to back a merger. Any transaction would involve both Chrysler and GMAC LLC, which loans money for car purchases and other purposes. Cerberus owns 51% of GMAC and GM owns the rest.
"Both GM and Chrysler are losing money. Analysts believe each company could start to run short of cash within 12 months.
br />"The auto makers and Michigan's congressional delegation have proposed at least three plans in recent weeks to unlock federal money for a GM-Chrysler merger. One is to seek an equity investment from the government. Another would draw money for the auto makers from the $700 billion Troubled Asset Relief Program, or TARP, set up ostensibly to help financial firms. A third possibility is accelerating the $25 billion in loans that the Energy Department is managing.
"GM and Chrysler declined to comment.
br />"An Energy Department spokeswoman said Monday the agency is "in the process of developing the rules for the loan program" and that it would be "premature" to set a timetable for when funds will be available. The agency has come under criticism from prominent Michigan figures in both parties after initially saying in September it could take 'at least six to 18 months or more' to disburse loans.
"On Monday, Moody's Investors Service lowered its ratings on GM and Chrysler. Even with the government loan program, Moody's said in a statement, "GM's liquidity profile will continue to erode in 2009" and Chrysler's ability to cover cash requirements may come under stress in 2009. Both GM and Chrysler had their ratings lowered one notch to Caa2. That's eight notches below investment grade. Moody's said it outlook for GM is negative and that it may cut Chrysler's rating again.
"Ford Motor Co. is rated B3, six levels into "junk," or non-investment grade, territory. Its rating is on review for possible downgrade, Moody's said."
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