Auto Bailout

GM and Chrysler Will Get More Help, With Tighter Strings

President Barack Obama will likely throw General Motors (GM) and Chrysler 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 to show they have strong business plans. The reasoning was that if the automakers sufficiently cut factory costs and retiree obligations, they would be rendered more viable and deserving of additional 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 enough cash to keep going for the next few weeks or months, but the Administration will set a firm deadline to get the restructuring achieved, 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 its bond debt from $28 billion to about $9 billion. Chrysler also has to reduce its debts.

Treasury has yet to spell out demands

"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 to 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 a further $16.6 billion. Chrysler has borrowed $4 billion and has asked for an additional $5 billion in loans. A GM spokesman declined comment and a Treasury Dept. official said only that details are coming Monday.

GM Bondholders Haven't Budged Yet

GM has been negotiating with its bondholders to slash the company's unsecured debt by two-thirds. But bondholders have balked, asking for a bit more than one-third in cash and the rest in stock. They have also asked the government to guarantee the debt. In the last week, the bondholders also claimed that they hadn't gotten to spend 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¢ 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 is asking the UAW to take less than half the $20 billion in cash and the rest in stock.

The problem is that GM may need to get the UAW and bondholders to accept more stock than the cash 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—right where the company was before it borrowed any government money. GM pays more than $3 billion a year in interest, and the debt payments are draining money that could otherwise go toward designing and marketing new models and developing technology.

Pressing Chrysler to find a partner

Bondholders have been leery of taking much in shares whose 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 fro—m 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 handily as the car market rebounds.

The Treasury Dept. may also weigh in on whether Chrysler can survive as a stand-alone carmaker or if it needs a partner. Members of the task force have met with Chrysler CEO Robert Nardelliand—reportedly—with Fiat CEO Sergio Marchionne. Chrysler has a deal to give Fiat 35% ownership if the U.S. automaker 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, more fuel-efficient model. 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 uncommitted as to whether the new cars must be made in the U.S. or can be imported.

Junk Car Plan Worked in Germany

McEleney said he met with the Auto Task Force in early March and told its members that current sales levels— running at an annualized rate of about 9 million cars, compared with 16 million or more in recent years—aren't sustainable for any car company.

A similar junked-car incentive did well for workers in Germany last month. The German government gave about $3,200 to consumers who 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 the auto industry plan that is coming Monday from the Obama Administration, 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 help rid the roads of old cars&mdash, which spew the dirtiest emissions.

Welch is BusinessWeek's Detroit bureau chief.


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