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It's Federal Loans Now Or Bust For Automakers, Analysts Say

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The Associated Press

Published: September 30, 2008

DETROIT - If credit remains locked up and auto sales continue to slump, the federal government's $25 billion loan package for the auto industry could be a huge help in keeping Detroit's downtrodden automakers afloat, lawmakers and industry analysts say.

Chrysler LLC, Ford Motor Co. and General Motors Corp., which likely will get the bulk of the loans, are losing billions and facing huge debts as they try to reshape their focus from trucks and sport utility vehicles to smaller, more fuel-efficient vehicles.

The loan legislation, approved by Congress on Saturday, was passed to help the industry retool factories and develop technology to meet new government fuel-efficiency standards of at least 35 miles per gallon by 2020, a 40 percent increase.

The money could come in the nick of time for cash-strapped automakers who might otherwise have trouble borrowing more to cover their bills.

Government red tape, however, namely regulations written by the Energy Department, could delay the loans by up to 18 months. Congress specified that the agency produce preliminary rules within 60 days, and lawmakers who support the industry hope the funding arrives by spring.

"The longer it takes, the less valuable and useful it is," said Sen. Carl Levin, D-Mich. "It may vary from company to company depending on their individual circumstances."

Levin says it's important to get the money to automakers within six months, because that's when they will retool factories for a big rollout of fuel efficient 2010 models. General Motors and Ford each have announced new small cars for 2010, and GM and Chrysler have committed to rechargeable electric cars in the same year.

All Eyes On Fuel Efficiency
Auto executives have said the government loans will speed up bringing the new technology to market, but they have pledged to make more fuel-efficient models regardless of whether the loans arrive. The loans could help them avoid making the choice between pursuing multiple fuel-efficiency technologies or further cuts, including more job losses, Chrysler CEO Bob Nardelli said last week.

Money is supposed to be available to the entire industry, but a clause in the legislation gives priority to "those facilities that are oldest or have been in existence for at least 20 years."

It's unlikely that Japanese automakers, the Detroit Three's main competitors, will seek any money, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

Ford already has $25 billion in long-term debt, while GM has about $32 billion. Both are losing billions with no short-term prospect for profits.

Chrysler, now a private company that does not have to report its debts, has seen the steepest U.S. sales drop of any automaker, down 24 percent through August.

In addition to covering losses and paying restructuring costs, all three are burning cash to retool plants, develop new gas engines and engineer new electric cars.

"You're swimming a river that's getting deeper and faster and wider," said Cole, who thinks the market will eventually recover and automakers will again make money. "The pot of gold on the other side is getting bigger."

All the headwinds mean the automakers can use government loans as quickly as possible, said Fitch analyst Mark Oline.

"It would be important for Ford and GM and Chrysler to get this money in the second half of 2009," Oline said, adding that the government loans would help keep the confidence of parts suppliers and consumers.

Saving $100 Million A Year

Automakers hope to receive the loans at government interest rates of about 5 percent, which would save them about $100 million a year for every $1 billion they receive. The auto manufacturers have poor bond ratings and would otherwise only qualify for double-digit interest rates.

The loans were authorized in last year's energy bill but not funded then.

Companies would need to build vehicles that are at least 25 percent more efficient than "vehicles with similar attributes" to qualify for the funding. Automakers have not said which projects they would seek funding for because the regulations have not yet been written.

As automakers wait for the loans, they will continue trying to cut expenses, take advantage of a new cost-saving contract with the United Auto Workers and sell assets to raise more money and ride out the downturn.

"They'll continue to pull the levers that they need to pull," said Pete Hastings, senior analyst with Memphis, Tenn.-based Morgan Keegan & Co. "They're not in a unique circumstance. Unfortunately, every industry that's economically sensitive is facing these severe headwinds."

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