G.M. Is Said to Soon Begin Paying U.S. Debt

November 16, 2009

G.M. Is Said to Soon Begin Paying U.S. Debt

General Motors,which emerged from a government-ordered bankruptcy restructuringearlier this year, will begin paying back its debt to the United Statesand Canadian governments earlier than expected, a person with directknowledge of G.M.’s plans said Sunday night.

The company, which received $50 billion in government financing toavoid collapse, will make its first payment of $1.2 billion toward $6.7billion of senior debt at the end of December, this person said on thecondition of anonymity. About 85 percent of that will be paid to theUnited States government, and 15 percent to Canada.

Of the $1.2 billion, $1 billion will go to the American governmentand $200 million to Canada. G.M. will continue the payments in eachquarter thereafter, until that debt is repaid.

Of G.M.’s bailout package, an initial $13.4 billion was money madeavailable, with strict conditions, in December by the Bushadministration under the Troubled Asset Relief Program.

G.M. received about $6 billion more in working capital from theObama administration in April and May, and was given $30.1 billion inbankruptcy financing and postbankruptcy restructuring money, for whichthe government received a majority stake in the new version of G.M.that emerged from bankruptcy.

Of the total, only the $6.7 billion, most of it provided by theUnited States, was considered a loan that required repayment. The restwas money traded for equity in the company.

G.M. did not have to pay back the loan until July 2015, and thegovernment did not expect to receive the money before then, the personsaid.

On Monday, G.M. is to report its first financial results sinceemerging from bankruptcy protection in July. The early debt repaymentcould be an indication that G.M.’s financial condition is strong enoughthat it can begin parting with the government money.

In a sense, G.M. is merely returning federal money that it was given as a cash reserve as it got back on its feet.

When it emerged from bankruptcy, G.M. received $16 billion in cashfrom the governments in order to restart its operation. It is repayingthe $6.7 billion using that cash, whose uses are restricted. The earlyrepayment will save G.M. much of the interest on that debt.

Under the terms of the loan, the United States owns 60.8 percent ofG.M., and Canada and Ontario hold 11.7 percent, in return for $10.5billion in financing. The United Automobile Workersunion holds 17.5 percent through its retiree health care fund, with anoption to take more of G.M. Bondholders have the remaining 10 percent.

G.M.’s board approved the repayment to the government, the personwith knowledge of the situation said, after discussions with the Treasury Department.

Although the cash was available to G.M., the person said therepayment was not a sign that G.M.’s problems were over. “They are notout of the woods yet,” the person said.

G.M. sought bankruptcy protection on June 1, after its efforts toreorganize outside of court were deemed insufficient by the Obamaadministration.

G.M. emerged from bankruptcy protection on July 10, much faster thanadministration officials, legal experts and automobile industryanalysts believed was possible.

Its swift exit from bankruptcy played a major part in G.M.’s abilityto repay the money now, the person with knowledge of G.M.’s plans said.“Absolutely, the company and the government were both planning for alonger period,” the person said.

There were three primary reasons that G.M. was able to repay the money, this person said.

Before G.M. sought bankruptcy protection, its former chief executive, Rick Wagoner, warned repeatedly that buyers would be reluctant to buy cars from a company in Chapter 11 protection.

Mr. Wagoner stepped down in March at the request of the Obama administration and was replaced by Fritz Henderson,now G.M.’s chief executive. Even after the change, both federal andcompany officials continued to fear that G.M.’s bankruptcy might causeits sales to fall by as much as 50 to 60 percent.

But sales did not fall as much as expected while G.M. was inbankruptcy, in part because the government offered to back thewarranties of G.M. vehicles bought while the company was under courtprotection. Its better sales meant G.M. did not have to draw as much onthe government’s cash.

At the same time, industry sales, which are at their worst levelssince the early 1980s, also were not as weak this summer as the companyand the government anticipated when G.M.’s business plan was drafted.

One reason was the “cash for clunkers”program, under which the government provided rebates of up to $4,500for people who traded in old cars. That lifted auto sales in July andAugust, sending buyers to showrooms just as G.M. needed them most.

Further, G.M.’s network of parts suppliers was not disrupted duringthe bankruptcy, as was expected by the company and the government, theperson with knowledge of G.M.’s plans said.

G.M.’s board has said it wants to pursue an initial public offering of stock in the second half of 2010.

Should G.M. continue paying $1.2 billion each quarter on the seniordebt, that would mean repayment of about half of that liability bythen, the person said.

Presumably, the money raised through the offering could be used to repay the remainder of the senior debt.

1 comment (Add your own)

1. Used Cars wrote:
G.M is known as of the best reputed brand all over the world. I think G.M was going to the bad phrase that time and i am sure G.M has solver those problems and will take care of such issues next time.

Fri, June 10, 2011 @ 11:42 PM

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