GM & CHRYSLER RESCUED? MAYBE!

President Bush recently announced a rescue (Bailout) plan for General motors and Chrysler LLC. The two automakers will receive government loans. However, the loans come with some tough conditions. Both automakers must come up with a plan and show by March 31st 2009 that they are financially viable. That’s a big task in a very short timeframe.

Here are the Highlights of the Bush Deal:

• GM gets a $13.4 billion loan, Chrysler gets a $4 billion loan
• Government gets stock warrants for the loans
• GM & Chrysler must get concessions from creditors
• Automakers must prove they are financially viable by March 31st
• Government can review all transactions over $100 million

The plan defines financial viability as showing a “positive net present value.” That means the companies cash inflows exceed its outflows. This will require huge reductions in expense and this will be the greatest difficulty.

Other loan terms demand concessions from management and shareholders. They are as follows:

• Limits on executive compensation
• Bans on dividend payments until the loans are repaid
• Grants of stock warrants to shareholders

The loan agreements list other conditions that are referred to as “targets.” The “targets” are not mandatory but deviations from them must be explained in the viability plan. The “targets” are:

• The Detroit 3 workers accept pay and work rules comparable to those of import brand workers.
• That half of automaker payments to retiree health trusts be in stock
• That the Union Jobs Bank – Which allows laid-off workers to collect most of their pay – be abolished.
  

So there is some pressure on the Union (UAW) to give a little also. It seems to be in their best interest to comply. If the U.S. automakers go out of business the Union would also be out of business.

SHORT HISTORY OF THE LEASING INDUSTRY

Contrary to what many people believe leasing has a long history. There are many records throughout history that make mention of this financial tool called leasing. The earliest records of leasing date back to sometime before 2000 B.C. In the ancient Sumerian city of UR, lease documents were found that were written on clay tablets. Those clay tablets recorded transactions of leases for agricultural tools, land, water rights and animals.

In approximately 400 B.C. the Persian Empire specialized in land leasing, but they also leased oxen and agricultural equipment. Other ancient civilizations, including the Greeks, Romans and Egyptians found leasing to be an attractive, affordable and viable method of financing equipment, land and livestock. The ancient Phoenicians were involved with ship charters which resembled a form of an equipment lease. Many of the same kind of negotiation issues that today’s lessors and lessees face were addressed in those ancient ship charters.

For centuries, the leasing of personal property was not recognized under English Common Law. The long term leasing of real property was allowed and in many cases was the only means available to acquire the use of land due to a very rigid system of land laws. However by 1284 there were changes in the laws and the leasing of personal property became permissible. In the early 1800s there were developments in the agricultural, manufacturing and transportation (railroad) industries which brought about new types of equipment. Many of these new types of equipment were suitable for lease financing.

As the demand for lease financing of equipment continued to grow in the United Kingdom, so too did the need for a similarly creative form of finance in the United States.
The first recorded leases of personal property in the US were in the 1700s. They provided for the leasing of horses, buggies and wagons by liverymen. As the types of, and need for equipment increased, so too did the use and development of leasing. The real growth in US leasing however, was caused by the railroad industry.

The first car rental business dates back to 1918. However, a Chicago car dealer named Zollie Frank offered long-term fleet leasing of automobiles in the early 1940s and is credited as the originator of the vehicle leasing industry. Today the vehicle leasing industry has annual lease revenues in excess of $50 billion.

Many equipment and vehicle manufacturers recognized the value of providing financing for their products throughout the development of the US leasing industry. Some manufacturers even went so far as to set up their own financing organizations. The manufacturers that chose not to, or who were unable to provide financing, were left with two options. First, let the customer independently seek financing or secondly, to work with an independent financial concern to set up some type of vendor financing program. Independent leasing companies were formed to provide this specific product of financing for manufacturers and dealers. Eventually independent leasing companies began providing leasing services directly to the lessee for other unrelated equipment.

Since the 1960s leasing has experienced much growth and has grown into a large and viable industry. In fact leasing has become the creative financing alternative of today. It is believed that this industry will continue to grow as more and more of the worlds equipment needs are met through this unique form of financing.