Automakers Back From Brink

Updated from 1:50 p.m.

The automakers will sidestep bankruptcy, at least in the near term.

Saying "Chapter 11 is unlikely to work for the American automakers at this time," President George Bush unveiled a $17.4 billion bailout plan for General Motors ( GM) and Chrysler, which face imminent liquidity problems.

Though he suggested bankruptcy as an alternative earlier in the week, Bush appeared to back away Friday, buying into the industry's fervent belief that consumers would be unlikely to buy cars from an automaker operating under Chapter 11.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers," he said. "These are not ordinary circumstances."

President-elect Barack Obama backed the plan at a later news conference announcing some of his new cabinet members. He said a failure of the automakers "would have had a devastating effect" on the economy and workers.

GM will receive $4 billion on Dec. 29 and $5.4 billion on Jan. 16. It will receive $4 billion more in February, if Congress agrees to release the second half of the funding for the Troubled Asset Relief Program. Chrysler, meanwhile, will get $4 billion on Dec. 29.

Both companies must submit plans that assure long-term, viable restructuring strategies, or they will have to quickly repay the money. Additionally, they must reduce their debt obligations by two-thirds and reach an agreement with the United Auto Workers to cut wages and benefits that are competitive with those at foreign automakers' U.S. plants.

Shares of GM surged Friday morning, but pulled back in the afternoon, when they were trading up about 11% to 4.05. Shares in Ford ( F)were trading about 1% higher to $2.87. Unlike its peers, Ford says it does not face an immediate liquidity crisis.

At a news conference Friday, GM executives said the term sheet for the loan package was signed at 8:56 a.m. Friday. CEO Rick Waggoner said company executives had provided extensive data to Treasury Department officials and others in the Bush administration.

"They provided their offer last night," he said. "We spent some time going back and forth on the issues." He resisted a reporter's suggestion that negotiations were difficult, saying, "I don't think it would be fair to say it was very contentious."

Meanwhile, CFO Fritz Henderson said the company is confident it can meet the schedule requirements of the funding plan, because, "What we need to do is to execute the strategy we laid out" in the restructuring plan GM submitted to Congress Dec. 2. "We have planned to be very aggressive," he said. GM's plan envisioned scaling back to four key brands, reducing manufacturing costs and slashing debt.

That plan also envisions $18 million in government assistance for GM - including loans of $12 billion and a $6 billion line of credit -- and assumes domestic vehicle sales of 12 million units in 2009. This now seems optimistic, given that many experts anticipate sales will drop to the 10 million to 11 million range, a level not seen in decades.

Credit analysts agreed Friday that $13.4 billion is unlikely to resolve GM's problems, particularly with the sales outlook so dismal.

"The loans are just a temporary bridge until March 31, when the automakers must show plans for long-term viability, including concessions from industry participants such as debtors and unions, or repay the loans," wrote Standard & Poor's analyst Efraim Levy, in a report. He rates GM a sell.

"We expect GM to quickly run through the funds and to need additional multibillion dollar funding just to meet 2009 needs during what looks like an auto depression," Levy wrote. "We view the news as good for suppliers, as it provides a lifeline to automakers, but industry outlook remains extremely challenging."

Fitch Ratings on Friday downgraded debt at both GM and Chrysler, saying bankruptcy remains a threat to both. In both cases, it downgraded issuer default rating to C, indicating that "default is imminent" despite the bailout.

The loan package envisions a debt-for-equity swap as a means to reduce debt. That "is expected to take the form of a distressed debt exchange, which is a default under Fitch's methodology, although how the exchange is to be accomplished remains highly uncertain," wrote analyst Mark Oline. "The threat of a bankruptcy remains, given the terms of the federal assistance, and the maturity."

In his speech, Bush made it clear that bankruptcy remains an option. He pointed out that GM and Chrysler "have not made the legal and financial preparations necessary to carry out an orderly bankruptcy proceeding that could lead to a successful restructuring" and said "the convergence of these factors means there's too great a risk that bankruptcy now would lead to a disorderly liquidation of American auto companies.

"A more responsible option is to give the auto companies an incentive to restructure outside of bankruptcy -- and a brief window in which to do it," he said.

But Wagoner noted that: "Our view has been all along that bankruptcy is a very high risk process, particularly for this industry and particularly at this time. Our intention is to proceed ahead (and) and to make sure that we can put together a plan that doesn't require that."

In a letter to employees and stakeholders on Friday, Chrysler CEO Bob Nardelli wrote that his company will use its $4 billion to "continue to implement our plan for long-term viability," and will work with stakeholders "to identify and achieve the cost-savings concessions we need."

Nardelli asked that suppliers "maintain their commitment to reasonable trade terms and normal fulfillment of orders as long as the federal loan is outstanding." Meanwhile, Chrysler owner Cerberus Capital Management said Friday it will invest the first $2 billion of Chrysler Financial profits in the financing firm's parent automaker. It said the funding will back up the $4 billion federal loan.

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