General Motors may get $25 billion in government loans

Posted by admin | General Motors | Thursday 11 September 2008 1:43 pm

General Motors Corp., Ford Motor Co. and their suppliers may get $25 billion in government loans to speed development of fuel-efficient vehicles this year and have to wait until next year for another $25 billion, analysts said.

The auto companies probably will be able to win support for $3.75 billion that must be appropriated to cover the costs of issuing the first $25 billion, Clint Currie, a Washington-based transportation analyst at Stanford Group, said in a report today. The odds against funding additional loans for the industry this year are 3-to-1, he said.

“We expect the attention needle on providing direct loans to Detroit to remain in the red zone for the next several weeks as executives from Ford, GM and Chrysler visit Washington,” said Currie, whose company advises investors on the likely outcome of federal policy. The companies may get the rest of what they seek in 2009, he said.

The U.S.-based automakers and their suppliers say they need the funding to help react to buyers’ rapid switch to more fuel- efficient cars from trucks after gasoline topped $4 a gallon earlier this year. GM and Ford get a majority of their U.S. sales from light trucks, and lost a combined $24.1 billion in the second quarter as industry sales of the pickups, sport-utility vehicles and vans fell 18 percent through June.

Funding for the loans may be included in the 2008 energy bill, in a second economic stimulus package or in legislation that would temporarily fund the government until Congress completes its budget work, House Speaker Nancy Pelosi, a California Democrat, told reporters.

Reduced Bankruptcy Risk

Funding the first $25 billion would “materially curtail” the bankruptcy risk at the U.S. automakers, JPMorgan & Chase Co. analyst Himanshu Patel wrote in a report released today. About 75 percent of the funds would go to GM, Ford and Chrysler LLC, adding $6 billion to liquidity for each over the next 1 to 3 years, the New York-based analyst said.

GM, with more emphasis on electric vehicles, may end up getting more of the funding, and the government loans would be in the same range as the $5 billion to $10 billion analysts estimate the Detroit-based company needs in additional liquidity during the U.S. decline, Patel said. He rates GM shares “overweight.”

GM spent $7.5 billion on capital projects and $8.1 billion on research and development last year.

The current structure of the loan program also would help automakers because any improvement in liquidity is allowed to be passed on to equity holders if the shares rise, Patel said.

Shares Decline This Year

GM shares have fallen 49 percent this year, and Dearborn, Michigan-based Ford’s have dropped 30 percent. Chrysler, owned by Cerberus Capital Management LP, isn’t publicly traded. GM today rose $1.33, or 12 percent, to $12.75 at 4:01 p.m. in New York Stock Exchange composite trading, and Ford gained 21 cents, or 4.7 percent, to $4.68.

The most likely place for automakers to get the funding they seek this year is the so-called continuing resolution, which is a law that lets the government keep operating when the current budget expires at the end of September, Patel said.

The auto companies may be able to get the rest of the money they seek next year after this November’s election, because both major presidential candidates, Republican Senator John McCain and Democratic Senator Barack Obama, back at least some funding, Currie said.

“It is our view that an additional $25 billion, bringing the total loan value to $50 billion, can (sort of) wait until next year,” Currie said. “Indications are that President Bush would tolerate a bill laden with the $3.75 billion appropriation to trigger the initial loan program, but would be less than giddy in signing off on additional funds.”

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F, , ) both saw their stocks buck early market weakness Thursday after J.P. Morgan said an expected $25 billion in loans would dramatically ease concerns of potential bankruptcies. Analyst Himanshu Patel said it is becoming more likely that the troubled auto industry will receive significant federal loans in the near future, with both presidential candidates supporting at least $25 billion in funding. Patel said GM’s risk profile, in particular, should improve markedly. GM’s stock jumped 8.3% while Ford’s gained 5.1%.

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