Saturday December 20 2008
The clock is ticking for General Motors and Chrysler. The automakers have 102 days to slash debt, renegotiate labour contracts and lay plans to cut thousands of jobs or face a government-mandated bankruptcy.
The Bush administration threw them a $13.4bn lifeline from the US bank-bailout programme, with $4bn more for GM in February provided Congress expands that fund. In exchange, the government gets warrants that will allow it to profit if the rescue succeeds and seniority over much of the companies' debt if the effort fails.
Yesterday's move means the US will have wide authority to call the shots in the auto industry for the first time since the 1980s bailout of Chrysler Corp and keeps GM and Chrysler alive long enough for a broader reorganisation plan from the incoming Congress and President-elect Barack Obama.
Maryann Keller, an independent auto analyst and consultant in Greenwich, Connecticut said: "The restructuring they're going to have to go through will be huge. This is money to tide them over. They're going to come back for more money. That's when the government is going to have to decide whether they're viable businesses."
The White House stepped in after a compromise plan backed by President George W Bush and House Democrats failed to pass the Senate, thwarting Bush's aim to avoid a "disorderly" bankruptcy that would have further weakened the US economy.
Chrysler and GM have until March 31 to meet the government's conditions. Without an infusion of cash, the companies said they were only weeks away from insolvency.
GM is reeling from almost $73bn in losses since 2004 and a 22pc slump in US sales this year. The biggest US automaker reported $16.2bn in cash as of September 30, and needs $11bn to pay monthly bills.
Chief Executive Officer Rick Wagoner said: "Our focus now turns to rapidly and fully implementing our restructuring plan."
Cerberus Capital Management LP's Chrysler has been battered by a 28pc plunge in US sales through November, the most among major automakers. It ended the third quarter with $6.1bn in cash and needs at least $3bn to operate, Chief Executive Officer Robert Nardelli told Congress on November 18. Ford Motor Co has said it doesn't need emergency aid.
In exchange for the federal loans, the automakers must provide warrants for non-voting stock, limit executive pay, open up financial records, not issue dividends until the debt is repaid and give the government veto power over transactions larger than $100m.
Government debt will become senior to other borrowing, to the extent allowed by law, and the automakers must cut their debt by two-thirds in an equity exchange.
Bush also linked the assistance to changes in automakers' union agreements, stipulating that half of the companies' payments to a United Auto Workers retirement fund be made in equity.
A programme that pays UAW members when they don't work must be eliminated, and union labour costs and rules must be recrafted so they're competitive.
The requirements could be modified by negotiations with the union and debtholders.
GM will get $4bn by the December 29, $5.4bn by January 16 and the final $4bn by February 17, provided Congress agrees to release the second $350bn of the funds allocated for the $700bn Troubled Asset Relief Programme. (Bloomberg)Clock ticking for Chrysler and GM to slash debt or go bankrupt