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Automakers' Massive Debts May Derail Bailout
DETROIT — They'll park some corporate jets, cut executive pay and serve up concessions from the United Auto Workers, but Ford Motor Co., General Motors Corp. and perhaps Chrysler LLC also will have to address massive debts to persuade a skeptical Congress to loan them money.
As the CEOs of all three companies prepare for a return trip to Washington this week seeking $25 billion in government loans to help them survive a worldwide economic slump, their debt likely will be scrutinized as Congress decides if they can once again become viable with help from the government.
GM alone spent $847 million on debt payments in the first nine months of the year.
"There's no guarantee these guys will make it" even with government help, said Rep. Jeb Hensarling, R-Texas, one of Detroit's critics who advocates letting them go into bankruptcy. "It's also why we have bankruptcy courts, so these businesses get reorganized and the resources are used in a better way ultimately to benefit our society."
Automakers argue that bankruptcy isn't an option, maintaining that no one will buy a car from a company that may not be around for the life of the vehicle. With sales at their lowest point in 25 years and no other options to borrow more cash, GM and Chrysler say government help is essential.
Cash stockpiles at GM and Chrysler are dangerously close to the minimum amount required to run the company, meaning they could have trouble paying all their bills by the end of the year. Ford, although burning cash at an alarming rate, borrowed more than $20 billion last year and says it can last at least through 2010.
GM, according to its quarterly report filed with the Securities and Exchange Commission, already owes creditors a staggering $45 billion, plus it must pay more than $7.5 billion early in 2010 to a United Auto Workers trust fund that will take over retiree health care payments. Ford owes more than $26 billion, with $6.3 billion due to its UAW trust fund at the end of 2009.
Chrysler, a private company, does not have to open its books, but its CEO, Robert Nardelli, has said it would be difficult for the company to make it without federal aid. All three likely are negotiating with the UAW for delays in payments to the trusts.
The answer to the debt problem may lie in another component of the plans that GM, Ford and Chrysler will deliver to Congress on Tuesday. CEOs from all three companies, plus UAW President Ron Gettelfinger, will appear again before the Senate Banking Committee Thursday and the House Financial Services Committee on Friday.
Two people briefed on GM's plan say the automaker will at least make an effort to negotiate swapping some of its debt for equity, either shares or warrants to buy them. Chrysler also is likely to include a similar provision, a person briefed on its plan said Monday.
None of the people wanted to be identified because the plans haven't been delivered to Congress.
GM's board approved the plan Monday after a two-day meeting.
But industry analysts say it makes sense for bondholders and other creditors to gamble on equity in the company with part of their GM debt in order to keep the automaker out of bankruptcy protection.
"There will have to be concessions made by debtholders," said Kevin Tynan, an auto industry analyst with Argus Research in New York. "The argument can be made that if not, there's a good chance you're not going to get anything back anyhow."
GM bonds already are trading at 20 to 30 cents on the dollar, so bondholders wouldn't be giving up that much, Tynan said.
A complicating factor is that bond rating agencies may further downgrade GM's credit if debt is exchanged for equity, said Standard & Poor's Credit Analyst Gregg Lemos Stein.
GM, he said, is now at a low CCC-plus, but if it swapped a large amount of debt for equity, Standard & Poors would view that as "tantamount to default" and give it an SD rating for "selective default," Lemos Stein said.
Critics say that with such huge debt payments, the Detroit Three will have less money for research than their foreign competitors, so they'll fall behind and eventually end up in trouble again.
GM and the other automakers argue that if they can get through the sales slump, and credit loosens so more people can buy vehicles, the companies will start making money as buyers return to showrooms in droves.
With revenue coming in, GM would restructure its debt, preserving funds for research on next-generation fuel-efficient products such as the Chevrolet Volt rechargeable electric car or the Chevrolet Cruze compact, said GM spokeswoman Renee Rashid-Merem.
"At the end of the day it's about prioritizing, and making sure your research and development dollars are spent on those things that are providing you a competitive advantage," she said.
But GM's filing with the SEC expresses doubt about its ability to pay for everything.
"If we continue to operate at or close to the minimum cash levels necessary to support our regular business operations, we may be forced to further curtail capital spending, research and development and other programs that are important to the future success of our business," the filing said.
GM also is likely to tell Congress about efforts to shed brands, although it would prefer to sell them rather than shutting down Pontiac, Saturn or Saab, said one of the people briefed on the plan. Shutting them down would require cash the company doesn't have, the person said.
On Monday, Ford announced that it was looking into the sale of its Volvo brand to raise cash.
Some members of Congress have urged the Big Three executives to take major pay cuts as part of the deal. Nardelli said he would work for $1 a year, and a similar commitment is expected from GM CEO Rick Wagoner. Ford plans include a pay cut for Ford CEO Alan Mulally, although the size of the cut was not immediately available.
That might not be enough for some lawmakers. Rep. James Clyburn, D-S.C., the Democratic Whip, told reporters Monday in Columbia, S.C., that the three CEOs should quit.
"If I had my way, all three of those guys would be in the unemployment line and I think that ought to be one of the conditions for us doing this," Clyburn said. "We need to have new leadership."
Commerce Secretary Carlos Gutierrez said in an interview Monday that the plans need to address some of the key structural issues facing the industry, such as costs, debt, dealer network costs and product lines.
"There needs to be a path to viability," Gutierrez said.
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Associated Press Writers Jim Davenport in Columbia, S.C., and Julie Hirschfeld Davis and Ken Thomas in Washington, D.C., contributed to this report.
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TOM KRISHER | December 1, 2008 09:56 PM EST |
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