One of the Obama Administration's key requirements for keeping General Motors (GM) and Chrysler alive is that both companies cut their debt drastically so they can become viable. And yet the Energy Dept. is gearing up to lend them billions more dollars.
This is less crazy than it sounds. The Energy loans are aimed at helping GM, Chrysler, and Ford (F) retool themselves as makers of fuel-efficient vehicles. But while an infusion of tax dollars could help the Detroit Three be globally competitive, it also would just replace some of the debt that the government is helping GM and Chrysler shed. (Ford so far has a much stronger balance sheet.)
Under the current proposal, Chrysler and the U.S. Treasury Dept. aim to winnow down the $23.8 billion the automaker owes creditors to $10.5 billion. But the company has requested an additional $6 billion from Treasury and $6 billion more from Energy to make more efficient cars. That would replace most of the debt Chrysler wants to shed and bring its borrowings back to $22.6 billion. For a company so weak it is being asked to merge with Fiat to survive, this may not be a winning strategy. "It's not a viable company," says an industry consultant, Maryann N. Keller. "They don't have the product plan and the people to make it."
GM's case is far less dire, but those green dreams could add a heavy slug of debt to its balance sheet, too. The government and GM are trying to negotiate deals that would wipe away much of the $28 billion it owes bondholders and at least half of the $20 billion it owes a retiree health-care fund. But GM has requested $8 billion more in loans from Energy for its fuel-efficiency push, not to mention $30 billion-plus from Treasury to help it survive until cratering U.S. auto sales recover.
Unless GM goes into bankruptcy or the feds swap a big chunk of government debt for equity—both of which are real possibilities—GM could end up a restructured company with lower labor costs, fewer brands, but lots of debt.
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