This morning, the House and Senate Democratic leadership announced the introduction of “comprehensive legislation that will help the struggling U.S. auto industry in the short term, while protecting millions of American jobs and taxpayers.” Although it is not clear whether there are sufficient votes in the House or Senate to enact auto industry relief legislation, these proposals are likely to dominate Congressional deliberations in the current lame duck session.
- Treasury would be required to make up to $25 billion of loans to operators of “2 or more manufacturing facilities for the purpose of producing automobiles in the United States throughout the 25-year period ending on the date of enactment of this title” (a time period that effectively excludes foreign automobile manufacturers from eligibility). It does not appear that this language is broad enough to cover manufacturers of automobile components.
- The $25 billion would be funded from the third tranche of EESA funds (the final $350 billion) and would be separate from the preexisting $25 billion loan authority to fund the retooling of auto plants to produce fuel-efficient vehicles.
- Auto manufacturers seeking loans would have to submit a completed application that includes a “statement of need for Government funding … to prevent a systemic adverse effect on the economy” together with such financial and other information as Treasury may request, together with a short-term operating plan that describes the planned use of proceeds, including “a commitment of resources to develop” a long-term plan, and “reasonable prospects for repayment” of the loans.
- Before approving a loan, the Treasury Secretary, “in consultation with the Financial Stability Oversight Board,” would have to determine that the failure of the applicant’s U.S. operations “would have a systemic adverse effect on the overall United States economy” and loans would be prioritized based on the magnitude of the impact of the applicant’s U.S. manufacturing operations on the overall U.S. economy and “other segments of the automobile industry, including the impact on levels of employment, domestic manufacturing of automobiles and automobile components, and automobile dealerships.” For purposes of this program, the Financial Stability Oversight Board would be expanded to include the Secretaries of Energy, Labor and Transportation and the EPA Administrator.
- Treasury would be required to designate a portion of the funds to help the manufacturer meet its short-term funding needs prior to submission of its long-term restructuring plan and reserve the balance to fund additional liquidity needs and implementation of an approved restructuring plan.
- By March 31, 2009, manufacturers receiving loans would have to submit an “acceptable restructuring plan to achieve and sustain the long-term viability and international competitiveness of the industry,” including proposals about how the manufacturer will achieve fuel efficiency standards, commence “domestic advanced technology vehicle manufacturing,” rationalize costs and capitalization, and restructure existing debt to improve its ability to raise private capital.
- Loans made would have a term of seven years (or longer as may be determined by the Financial Stability Oversight Board), but the maturity of any loan to cover short-term funding needs would be accelerated if an acceptable long-term restructuring plan is not submitted or the recipient breaches other obligations under the loan. Loans would bear interest at 5% for the first five years, and 9% thereafter.
- Treasury would have to receive a warrant to purchase either non-voting common stock or preferred stock or the economic equivalent having a value at least equal to 20% of the loan amount. For publicly traded applicants, the warrant price would be based on the trading price of the common stock during a 15-day period ending prior to the date the legislation was introduced (to allow the taxpayers to share in any increase in the common stock trading price resulting from announcement of the bill).
- Recipients of loans would be prohibiting from paying any dividends for the duration of the loan and would be required to comply with the executive compensation limitations that generally apply under EESA, plus some additional, more stringent, requirements, including outright prohibitions against paying any bonus or other incentive compensation to any employee whose annual base compensation exceeds $200,000, making any payment to a senior executive officer “for departure from a company for any reason,” or any compensation plan that “could encourage manipulation of reported earnings to enhance compensation.”
- For the duration of the loan, Treasury, in consultation with the Financial Stability Oversight Board, would have the power to review and prohibit any asset sale, investment, contract or commitment in excess of $25 million.
For procedural reasons, the proposed Senate bill is tacked on to a previously approved House measure providing additional emergency unemployment compensation assistance. While the proposed Senate bill is similar on the whole to the House bill, it is arguably less detailed in certain important respects and includes certain key differences, including the following:
- Treasury’s authorization would cover both automobile manufacturers and automobile component manufacturers operating at least one manufacturing facility in the United States “throughout the 20-year period ending on the date of enactment of this title.”
- The composition of the Financial Stability Oversight Board would not be changed for this program, and Treasury would not be required to consult with the Oversight Board to any broader extent than under existing EESA provisions.
- The separate requirements for loan applicants under the House proposal to receive a short-term bridge loan and longer-term liquidity and restructuring funding appear to be combined into one provision in the Senate proposal, as applicants need only submit “a detailed plan on how the Government funds requested will be utilized to ensure the long-term financial posture of the company, and how such funds will stimulate automobile production in the United States and improve the capacity of the company to pursue the timely and aggressive production of energy-efficient advanced technology vehicles.” Accordingly, loan recipients under the proposed Senate bill would not have to submit a separate long-term restructuring plan, as under the proposed House bill. Additionally, Treasury would not be required to designate funding based on short- and long-term needs of loan recipients.
- Loans would carry a term of at least ten years (or longer as may be determined by the Treasury), without being subject to any apparent acceleration provisions.
- Treasury must receive a warrant or senior debt instrument in accordance with pre-existing EESA Section 113(d) requirements.
- While loan recipients would be required to comply with executive compensation standards similar to those contained in the House proposal, the Senate proposal would prohibit payment of any bonus or incentive compensation to any employee whose base salary compensation exceeds $250,000.
- The Senate proposal does not contemplate the ability of Treasury to review and prohibit any asset sale, investment, contract or commitment by the loan recipient.
In light of these proposed bills, the Senate Banking Committee is holding a hearing today, entitled “Examining the State of the Domestic Automobile Industry,” at which the CEOs of Ford, Chrysler and General Motors are testifying. The House Financial Services Committee will be holding a similar hearing tomorrow.