Questions About the Bailout’s Call Option
The White House today unveiled a plan to inject $17.4 billion into General Motors and Chrysler LLC to prevent the companies for pursuing bankruptcy protection.
The capital infusions come with a host of conditions, among which is, as described by Bloomberg:
Under the terms of the plan, if the companies can’t demonstrate financial viability by March 31 the loans will be called and the money must be returned, the statement said.
Here’s how the Wall Street Journal describes it:
Viability Requirement: The firms must use these funds to become financially viable. Taxpayers will not be asked to provide financing for firms that do not become viable. If the firms have not attained viability by March 31, 2009, the loan will be called and all funds returned to the Treasury.
How this clause works is a mystery to me. If the companies can’t demonstrate financial viability, there won’t be any money to call. If they don’t use the funds, they can’t achieve financial viability. Talk about circular logic.
I am also of the opinion that GM and Chrysler face a troubling future regardless of the capital infusion. President Bush has savvily pushed the problem on President-Elect Obama’s plate. By Jan 20, I foresee GM and (more likely) Chrysler will face new liquidity challenges. And those challenges will be more acute because taxpayers have already dumped $17.4 billion into the problem.
“What we are interested in is viable US auto manufacturing,” a White House press officer said this morning.
Whether they are truly viable — bailout or not — is a worthy discussion indeed.
See coverage of the bailout from Bloomberg, the Washington Post, The New York Times, and The Wall Street Journal.
I guess that is why there were no takers in the private sector for this debt. I thank that in general the government is doing a real smart thing with these “bailouts”. The capital infusion into banks started out as the goverment buying some of these non-senior “toxic” tranches in CDOs, MBS, etc. Who’s going to value this stuff? Certainly not Moodys, S&P or FItch! Then they did a smart thing…Inject capital as preferred stock (quasi debt) and now outright senior debt. In both cases the subordinated parties (common stock holders with banks and common stock and bond holders with the auto companies) keep taking the hits and provide a cushion for the taxpayer position and the taxpayer takes a ton on warrants on the company. At the end of the day if the banks and auto companies survive the taxpayer gets their money back PLUS a very healthy return via the warrants. And if the companies don’t survive the taxpayers have the subordinated parties there to take the bulk of the losses. Pretty smart!
One condition is at least 2/3 of debts converted to equity. As far as I know now, the committed debt conversion ratio is far below that target.
For anyone who’s interested, here are the loan-term sheets for GM and Chrysler.
The more I think about this, it seems like the government is providing a sort of pre-DIP financing. Is that your read, folks?
That is why is important to change passwords and logins when employees that may have access to that information leave the dealership.
http://www.autobulk.com