The Militant Libertarian

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Saturday, November 07, 2009

GAO Report Not Hopeful for GM, Chrysler Loan Paybacks or IPOs

Edmunds Auto Observer

A newsflash that won't surprise critics of the government bailouts for General Motors Co. and Chrysler Group LLC: the federal agency charged with overseeing the U.S. Department of Treasury's $81.1-billion in loans to the two companies, their finance arms and suppliers says not to expect full repayment of those billions.

The Government Accountability Office report, issued yesterday, repeats the now-common rejoinder that the government wants to get out of the auto business.

But the report also presents the distinct likelihood that won't happen anytime soon - viewing with candid skepticism the often-cited potential for GM to render an initial public offering in order to begin repaying its near $50 billion in government loans. This stance comes on the same day former GM director Jerry York scoffed at the notion of GM engaging in an IPO as soon as next year.

"It's the dumbest thing in the world to be talking about a (GM) IPO right now," Reuters reported York as saying at an auto-industry conference in Detroit.

The GAO report more discreetly concluded: "Although Treasury officials told us they are considering all options for divesting the government's ownership interests, including an initial public offering or private sale, they have focused primarily on a series of public offerings for GM and have not identified criteria for determining the optimal time and method to sell.

"Regardless of the option pursued, however," the report continued, "Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially above what they have been in the past."

Downsized, But Futures Still In Doubt

The GAO report notes that GM and Chrysler should be positioned to better control their balance sheets now that bankruptcy and ongoing restructurings have allowed both companies to shed a substantial amount of debt and other liabilities.

GM has cut its number of factories from 47 at the end of 2008 to a current 34 - nearly a 28-percent reduction. And its hourly- and salaried-employee ranks have been chopped by 12.3 percent and 8.6 percent, respectively.

Chrysler's cuts have been proportionally similar. But despite each company's drastic reduction of long-term debts and structural costs, the report concludes, "Whether and to what extent these changes will improve Chrysler's and GM's profitability and long-term viability remains to be seen."

The report says that for GM to repay its indebtedness in full, it would have to achieve a market capitalization of $66.9 billion, nearly 20 percent greater than the company was ever valued.

Chrysler would have to build a market capitalization of $54.8 billion - more than 50 percent higher than the $37 billion the company was appraised to be worth when it merged with Daimler AG in 1998.

The Treasury said comparing today's GM and Chrysler with their previous forms is not valid because the companies are vastly leaner and less debt-encumbered, but the projected valuations needed to repay the each company's loans from the Troubled Asset Relief Program nonetheless are stark indicators of what wholesale operational turnarounds are required.

Not Involved - But Sort Of Involved

The GAO report also reminds that while the Dept. of Treasury - backed by many Obama administration officials - insists it has no intention of telling the companies how to run their operations, there are indeed some rather specific guidelines.

Chief among those suggestions is a requirement GM, for example, "use its commercially reasonable best efforts to ensure that the volume of manufacturing conducted in the United States is consistent with at least 90 percent of the level envisioned in GM's business plan.

And at least 40 percent of Chrysler's sales volume must be comprised of vehicles produced in the U.S. or its total U.S. production volume this year be at least 90 percent of that produced in the U.S. last year.

The companies also must keep the Dept. of Treasury appraised of any meaningful changes in their ability to fund pension plans. And in a condition that has seen wide exposure, compensation for both companies' top executives must be approved by a specially appointed "pay master."

Most important and anticipated are the specific conditions for financial reporting that are set to begin next year. For GM, which owns 60.8-percent of GM's equity and more than $2 billion of its preferred stock, these include quarterly and annual consolidated balance sheets, frequent forecasts and monthly liquidity reports - not to mention "other information that Treasury might periodically request." - Bill Visnic, senior contributing editor

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