Following weeks of hearings and congressional debate regarding their future, General Motors Corp. and Chrysler LLC will finally receive emergency financial relief today from the U.S. Treasury. After talks collapsed last week in the Senate over a House-passed $14 billion emergency relief package for the Big Three U.S. automakers, which includes Ford Motor Co., President Bush today announced that GM and Chrysler would receive emergency bridge loans of up to $17.4 billion from the federal government, in exchange for an extensive restructuring which “will require meaningful concessions from all involved in the auto industry.” Said President Bush, “Under ordinary circumstances, I would say [bankruptcy and liquidation are] the price that failed companies must pay – and I would not favor intervening to prevent the automakers from going out of business. But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action.”
GM stated that the government’s provision of financial assistance “ helps to preserve many jobs, and supports the continued operation of GM and the many suppliers, dealers and small businesses across the country that depend on us.” Cerberus Capital Management, L.P., which controls Chrysler, also issued a statement applauding the development, and also disclosing that “In connection with the loan to be provided by Treasury, Cerberus has agreed to utilize the first $2 billion of proceeds from Chrysler Financial to backstop the loan allocated to Chrysler automotive.” Ford CEO Alan Mulally stated that it “welcome[d] action by the Administration to provide emergency funding” for GM and Chrysler, though he reaffirmed that Ford was “not seeking short-term financial assistance from the government.”
President Bush and Treasury Secretary Paulson confirmed that “Treasury will make these loans using authority provided for the Troubled Asset Relief Program,” which is notably divergent from the position previously taken by the White House and Treasury regarding the use of TARP funds. The loans will be granted to the auto companies “under conditions similar to those Congress considered last week.” Furthermore, Secretary Paulson stated that “as a result of this decision [to aid the auto industry], Treasury effectively has allocated the first $350 billion from TARP,” and “Congress will need to release the remainder of the TARP to support financial market stability.” However, there is no indication that Secretary Paulson or the Bush administration will be formally requesting the additional funds, presumably choosing to leave that battle for the Obama administration.
Pursuant to the Indicative Summary of Terms released by Treasury of the secured term loan facilities for GM and Chrysler, GM and Chrysler are eligible to receive up to $4 billion each by December 29, 2008. Also, GM is eligible to receive an additional $5.4 billion by January 16, 2009, and if Congress releases the remaining TARP funds, an additional $4.0 billion by February 17, 2009. The White House has also issued a Fact Sheet describing the key terms of the loans, but the Fact Sheet differs in some subtle respects from the Indicative Summary of Terms, so the description of the secured term loan facilities set forth below relies more on the Indicative Summary of Terms.The secured term loan facilities for each automaker contain the following identical provisions:
- President’s Designee: The President will designate one or more officers from the Executive Branch to oversee the funding and compliance by the automakers with their restructuring plans. Currently, the President has named Secretary Paulson to oversee such matters, though the incoming Obama administration will be tasked with designating an executive branch member to determine if the automakers are meeting the conditions of the loans.
- Restructuring plan: Each automaker must submit to the President’s Designee, by no later than February 17, 2009, a restructuring plan which addresses the automaker’s plans for achieving long-term viability, international competitiveness and energy efficiency. The long-term restructuring plans must include proposals for how the automaker intends to meet the following goals: repayment of government financing; compliance with fuel efficiency requirements; achievement of positive net present value; rationalization of costs, capitalization and capacity; and achievement of a competitive product and cost structure. By March 31, 2009 (unless that date has been extended by the President’s designee for no longer than 30 days), the automaker must submit “a written certification and report detailing the progress made by the [automaker] in implementing its [r]estructuring [p]lan.” If the President’s Designee has not approved the restructuring plan of an automaker within the specified time period, the loan will become due and payable by 30 days after that date.
- Loan terms: The loans will have a term of three years, maturing on December 29, 2011, with no prepayment penalty, though maturity of any loan may be accelerated to an earlier date if the automaker fails to submit a restructuring plan which has been approved by the President’s Designee by March 31, 2009 (unless such period has been extended by the President’s designee for no longer than 30 days), or upon a specified event of default. Interest on each loan will accrue at an annual rate of three-month LIBOR or a 200 basis point LIBOR floor, whichever is greater, plus 300 basis points (or 800 basis points upon a specified event of default).
- Executive compensation restrictions: Automakers will be required to comply with the executive compensation limitations that generally apply under the Emergency Economic Stabilization Act of 2008, and other more stringent limitations, including outright prohibitions against paying any bonuses to the 25 most highly-compensated employees, making any golden parachute payments, and having any compensation plan that encourages manipulation of reported earnings to enhance compensation.
- Aircraft divestment and restrictions on expenses: Automakers must divest any private passenger aircraft currently owned, and are prohibited from acquiring or leasing any such aircraft so long as the loan remains outstanding. Additionally, each automaker must implement comprehensive written policies on corporate expenses which address “hosting, sponsorship or other payment for conferences and events,” travel accommodations and expenditures, consulting arrangements with outside service providers, new real estate leases or acquisitions, office or facility renovation expenses, and entertainment expenses, among other things.
- Review of material transactions: The President’s Designee will have the power to review and prohibit any asset sale, investment, contract commitment or other transaction in excess of $100 million, if he “determines that it would be inconsistent with or detrimental to the long-term viability” of the automaker.
- Term sheet requirements: Each automaker must use its best efforts to cause to occur, and must submit to the President’s Designee, by no later than February 17, 2009, a term sheet, signed by the automaker and the relevant counterparty which agrees to, (1) reductions in wages and severance payments to align with the compensation structures of Japanese automakers operating in the U.S., eliminating compensation and benefits (other than customary severance) to U.S. employees who have been fired, laid-off, furloughed or idled, and applicable of work rules that are competitive with Japanese automakers operating in the U.S.; (2) modifying their respective voluntary employees beneficiary association (or similar account) (VEBA) to provide, among other things, that up to one-half of any future contributions to the VEBA may be made in stock; and (3) an exchange offer in which not less than two-thirds the automaker’s existing public debt is converted into equity or debt.
- Information access and reporting requirements: While any loans remain outstanding, the automakers will be required to provide the President’s Designee with access to all information, including books, records and other data, relevant to monitoring the government’s interests. Each automaker also must provide periodic reports or certifications with respect to its financial status to the President’s Designee.
- Covenants: The automakers will be subject to customary covenants, including, but not limited to the following negative covenants: prohibition on redemption or buyback of any capital stock, restrictions on transfers of assets or issuance of stock that would dilute the warrants, prohibition on payment of any dividends or distributions, prohibition on creation of any new U.S. pension obligations until all U.S. pension plans currently maintained by the automaker have been fully funded, limitations on transactions with affiliates, and prompt notice to the government of any material adverse changes affecting the automaker.
- Events of default: Events of default include breach of any representations, warranties or covenants; default on any payment obligations; bankruptcy or insolvency; change in control of any automaker; default by the automaker on any other debt or prepayment obligations equal to or exceeding $10 million; and the termination of a perfected security interest held by the government. Upon an event of default, all funds owed to the government are immediately due and payable.
- Warrant terms: The President’s Designee must receive warrants to purchase non-voting common stock of each automaker having a value equal to 20 percent of the maximum loan amount (which, in the case of GM, appears to include the amounts potentially disbursable in January and February). The warrants will be immediately exercisable, in whole or in part. After the loans have been repaid by the automakers, the automaker will have the right to repurchase any common stock held by the Treasury at fair market value, or if no recognized market value exists, then the value attributed to the shares by an independent third party appraiser. If the automaker is privately held, as with Chrysler LLC, the Treasury will receive, in lieu of warrants, additional notes with the same priority and general terms as the loan facility, in an amount equal to 6.67% of the maximum loan amount.
The Summary of Terms for the loan facilities remain subject to the completion of due diligence, legal and other internal review by the Treasury, and final terms will be included in definitive documentation executed by the Treasury and the automakers.