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Stock Strategist Industry Reports

Detroit after the Bailout

Even with TARP loans, there are tons of issues in the U.S. auto industry.

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With President Bush's Dec. 19 announcement to loan up to $17.4 billion to  General Motors (GM) and Chrysler LLC with funds from the Troubled Asset Relief Program (TARP), we thought now would be a good time follow up on our Dec. 9 Stock Strategist industry report on the current state of the U.S. auto industry. It appears 2009 will be the most uncertain year in the industry's history and one that will likely see the demise of many suppliers and dealerships. The Detroit 3 could liquidate as well, but we think the possibility is remote with the Democrats in power in Washington, D.C.

We will know more about GM and Chrysler's fate in the next few months, but we will focus most of our discussion on GM because Chrysler is a private company. GM's Dec. 19 loan term sheet says that by Feb. 17, 2009, GM must submit a restructuring plan that will enable it to "achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company." Provisions of such a plan include repaying the government loan and complying with federal fuel regulations. There are three critical provisions to GM avoiding bankruptcy and the company must submit signed agreements to the government by Feb. 17 from all parties for these three conditions. First, GM must reduce its unsecured public indebtedness by "not less than two-thirds through conversion of existing public debt into equity or debt." Per its 2007 labor agreement with the United Auto Workers (UAW), retiree health-care costs are transferred to a VEBA account run by the UAW on Jan. 1, 2010. GM was to fund this VEBA through cash and convertible GM debt, but now the government says the UAW must accept at least half of all future GM VEBA contributions be made in the form of GM stock. Finally, the UAW must also amend its 2007 labor agreement (rather than wait until it expires in fall 2011) so that GM has complete labor cost parity with the U.S. employees of  Toyota (TM),  Honda (HMC), and  Nissan (NSANY). GM must then submit a progress report by March 31, 2009, at which time the government must decide if GM's plan allows it to be viable. If not, the government could call its loans due by the end of April, which would force a bankruptcy filing.

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David Whiston has a position in the following securities mentioned above: CVR. Find out about Morningstar’s editorial policies.