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.
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