Yesterday, the Big Three U.S. auto chief executives submitted restructuring plans to the Senate Banking Committee and the House Financial Services Committee, in response to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid’s November 21st request calling on the auto executives to “submit a credible restructuring plan that results in a viable industry, with quality jobs, and economic opportunity for the 21st century while protecting taxpayer investments” by December 2nd. Pelosi and Reid stated that upon receipt of these restructuring plans, “this Congress is prepared to consider additional legislation” to assist the auto industry, as initial legislative efforts and recent congressional hearings have proved unfruitful in securing additional funding for the industry.
In each of their plans, the auto companies indicated that they had already embarked upon various restructuring efforts prior to the emergence of the financial crisis, though recent events have served to accelerate these efforts. Pointing to the negative impact of the persisting financial crisis, restricted credit markets and weakened consumer confidence on automotive industry sales volumes, the auto companies noted in their respective plans that they were requesting government assistance totaling $34 billion in the aggregate. The stated basis for these amounts included the “perceived need to restructure” the auto industry, trying to prevent damage to the overall economy should one or more of the automakers collapse, improving the ability of their finance arms to access liquidity, and financing their cyclical needs in light of the frozen credit markets.
Ford Motor Company announced a comprehensive business plan, entitled the “One Plan,” in which it provides an overview of the current business environment, discusses Ford’s plan for future viability and answers specific concerns posed in Pelosi and Reid’s letter. In Ford’s plan, submitted by CEO Alan Mullaly, Ford requests government assistance in the form of a “stand-by’ line of credit, in the amount of up to $9 billion at Government borrowing rates, for a 10-year term, with [conditions consistent with TARP legislation]” to support Ford’s restructuring.
Ford’s One Plan consists of the following key priorities and the associated actions already taken or to be taken in order to achieve these priorities:
- Aggressively restructure to operate profitably at current demand and changing model mix: Aligning manufacturing capacity to meet real demand by allocating approximately 50% of future U.S. capacity to small and medium-sized vehicles; strengthening the U.S. supply base and consolidating the dealer network; consolidating operations and improving the cost structure of Ford Motor Credit Company (FMCC), its finance arm; and reducing salaried personnel costs, fulfilling obligations to employees and retirees related to pension and healthcare, and working with United Auto Workers (UAW) to transform the hourly personnel cost structure.
- Accelerate development of new products that customers want and value: Establishing a balanced portfolio by adapting to the shift to smaller vehicles while maintaining leadership in its existing areas of strength; delivering dramatic improvements in vehicle quality, safety performance and fuel economy, including investing $14 billion in the U.S. on advanced technologies; implementing a three-phased approach to sustainability through vehicle electrification and hybrid development; and improving engineering and efficiency to make production of small cars profitable in the U.S.
- Finance plan and improve balance sheet: Obtained $23.5 billion in debt financing in 2006; eliminated common stock dividends; issued more than $3 billion in new equity through debt exchanges and direct issuances in 2007 and 2008; sold Aston Martin, Jaguar, Land Rover and the majority of investment in Mazda; participated in funding programs from the European Central Bank and the Fed’s Commercial Paper Funding Facility, and providied feedback to the Fed and Treasury on the Term Asset Backed Securities Loan Facility; and submitted an industrial loan company application to the FDIC for FMCC.
- Work together effectively as one team, leveraging global assets: Reviewing regularly Ford’s business environment, risks and opportunities, strategy, and identifying areas of the One Plan that require additional attention; partnering with shareholders to assist with the plan’s execution; and reaching out to customers, dealers, suppliers, employees, UAW, investors, communities, retirees and federal, state and local governments.
According to General Motors Company, its restructuring plan serves as a “blueprint for creating a new General Motors, one that is lean, profitable, self-sustaining and fully competitive.” While noting that it is “larger than the amount discussed during the Congressional hearings of November 18-19,” GM requests a total of up to $18 billion in term loan and revolving credit facilities, of which up to $12 billion will comprise a total term loan facility of three draws, to ensure minimum liquidity levels through December 31, 2009, and a $6 billion committed line of credit from the government “to ensure adequate liquidity under more severe U.S. industry conditions.” With respect to the $12 billion term loan, GM asks that the government consider structuring a portion of it “as preferred stock, a more permanent source of capital (analogous to the TARP).” Additionally, GM requests that a Federal Oversight Board be created to “provide Congress transparency around the temporary loan facilities, to ensure that such loans are being spent for the intended purposes as outlined in [GM’s plan], and to confirm that the restructuring benchmarks required for draws are met.” To demonstrate its commitment to restructuring, GM notes that it has and will continue to undertake sacrifices, including the suspension of shareholder dividends, cessation of all corporate aircraft operations and reduction of 2009 salaries to $1 for Chairman and CEO G. Richard Wagoner, Jr., and the GM Board of Directors.
GM’s plan consists of the following key priorities and the associated actions already taken or to be taken in order to achieve these priorities:
- Reduction in brands, nameplates and retail outlets: Focusing “substantially all of its product development and marketing resources” on its four core brands Chevrolet, Cadillac, Buick and GMC, and accelerating efforts to combine the Buick, Pontiac and GMC brands into a single dealer distribution network; exploring strategic alternatives for the Hummer, Saab and Saturn brands; and reducing the number of GM retailers.
- Manufacturing and structural cost reductions: Maintaining industry leadership for workplace safety and “sustainable, environmentally-friendly manufacturing methods” by achieving ‘landfill-free’ status at 50% of GM’s manufacturing operations by 2010; reducing legacy costs, “especially relating to retiree healthcare and pension expense for both hourly and salaried employees”; consolidating assembly plants; and negotiating wages and benefits for current and new workers to become fully competitive with Toyota by 2012.
- Fuel efficiency and vehicle quality improvements, and full energy regulatory compliance: Changing product mix to launch “predominately high-mileage, energy-efficient cars and crossovers;” increasing flex-fuel and hybrid-equipped vehicles; investing approximately $2.9 billion in alternative fuel and advanced propulsion technologies; submitting Section 136 applications to the Department of Energy for high fuel-efficiency projects; and offering competitive warranties and related coverage.
- Balance sheet restructuring and supplementing liquidity: Selling various “non-core assets with estimated proceeds of at least $2 billion;” and continuing to reduce capital expenditures and make working capital improvements.
In its restructuring plan, Chrysler LLC requests a $7 billion secured working capital bridge loan by December 31, 2008, “to meet short-term deficiency in [Chrysler’s] liquidity and working capital,” which is contemplated to be “on terms consistent with those provided by the Government under existing or contemplated loan programs and contain equity enhancement opportunities to ensure that taxpayers will benefit from appreciation of shareholder value.”
Chrysler’s plan consists of the following key priorities and the associated actions already taken or to be taken in order to achieve these priorities:
- Developing partnerships, strategic alliances or consolidation: Achieving synergies through factory rationalization, sharing platforms and components and sharing new technical innovations.
- Providing cars and trucks that customers want to buy: Improving “fuel efficiency, quality, technology and consumer appeal” of its product lines, through design changes, a lifetime power train warranty and new product launches; producing all-electric vehicles; and maintaining its commitment to vehicle safety.
- Reducing executive compensation: Complying with “all conditions related to executive compensation established under the Emergency Economic Stabilization Act of 2008 (EESA);” and reducing CEO Robert Nardelli’s annual salary to $1 during the plan period.
In their plans, Chrysler and GM noted that filing for bankruptcy would not be a reasonable option, citing concerns of further depressing auto sales due to “consumer fears of long-term warranty, resale value and service-related issues,” impairing a “multitude of separate classes of holders of claims and interests” and the inability to obtain adequate debtor-in-possession financing.