Over at Conglomerate, David Zaring has an interesting discussion of some of the auto bailout plans. What follow are some assorted thoughts on the auto bailout:
1. The Bailout Debate Is Irrelevant Absent a Viable Business Plan
To my mind, the debate over how to help the automakers is a secondary issue. The automakers' key problem is that they don't have a viable business plan for a restructured company that the key constituencies are behind. Until and unless they have such a plan, debates over using bankruptcy or not or government bailout funding are really irrelevant.
Without a viable business plan, the automakers will eventually go into bankruptcy for burial. With a viable business plan, bankruptcy could potentially be a very useful mechanism for its implementation.
Can the OEMs get the union, secured lenders, and suppliers on board with a business plan? If they can, they bankruptcy can be used to
screw deal with the bondholders, dealers, and equity. (No fun being unsecured and replaceable!) But if the union, secured lenders, and suppliers aren't marching in lock-step, bankruptcy will likely be the end.
Likewise, debates over making a bridge loan or not all skirt around the key question--what is it a bridge loan for? If the issue is that the automakers need another month or two to cement a business plan, that's one thing. But if it is a "bridge loan to nowhere" it's another matter.
In any case, the administration's current idea of using TARP funds (only $15bn are still uncommitted) won't help much--the automakers go through $3-$4bn in cash a month, so $15bn probably only buys 3-4 months. That's not a very long bridge.
2. DIP Financing.
By the same token, though, these companies will need enormous DIP financing if they are to make it through a bankruptcy. Even a quick pre-pac, say 3 months, would require probably $6-$9 billion for GM alone. And a longer bankruptcy would need much more. It'd be very tough to raise this privately without the loan being at exorbitant terms.
The sheer size of the DIP facility that would be needed also makes me wonder how serious the Ensign-Shelby approach is. This proposal would authorize Treasury to be DIP financier up to $25bn total for all three OEMs. If all three end up in the Chapter, $25bn might not be enough. And the key question, left unaddressed by the proposal, are the terms of the financing. Would it be at traditional DIP loan prices? The cost of the financing alone then might destroy the ability to restructure. Or would Treasury lend at something like cost-of-funds? What sort of covenants and monitoring would Treasury insist on? Negotiation of the DIP financing with the government is not a pretty prospect--if the OEMs' assets are all secured and the government wants priming liens, how's that fight going to look?
3. Self-fulfilling Prophecies of Insolvency
I wonder, also, how much prolonged financial distress is hurting the automakers' sales. It's bad enough for them that consumer confidence is down and financing is harder to come by. But if you're a consumer waivering between
two brands, do you go with the automaker that might not be around in a year or
the one that will be? GM is worried about a bankruptcy filing hurting its sales, but I've got to think that the mere possibility of a filing is doing plenty of damage to sales already.
The insolvency possibility could also be a self-fulfilling prophecy with the suppliers, as Ron Gettlefinger noted. The suppliers have a symbiotic relationship with the
OEMs. But if one supplier starts asking for (and gets) cash on the
barrelhead, it will set off a run, and the trade credit cushion of say 90 days between delivery and payment that the
automakers have will disappear, accelerating the OEM's liquidity problems.
This brings me back to the bridge loans. Maybe the purpose of a bridge loan is just to head off a run on the OEMs. But if there isn't a viable business plan in the wings, it's only kicking the can down the road...until the next administration. Maybe that's the real purpose of the bridge loan.