GM Requests $12B in Term Loan and $6B Revolving Line of Credit from Congress; Plan Outlines Increased Production of Fuel-Efficient and Alt Energy Vehicles

3 December 2008

During the four-year plan window, GM will invest approximately $2.9 billion in alternative fuel and advanced propulsion technologies; more than $2B of that goes to hybrid and EREV platforms; 26% of the total ($758M) goes to EREVs alone). Click to enlarge.

GM is asking Congress for term loans of up to $12 billion to provide adequate liquidity levels through 31 December 2009. In a four-year Restructuring Plan submitted to Congress, GM said it anticipates an initial draw of $4 billion in December 2008, another $4 billion in January 2009, and a third draw of up to $2 billion in the February-March time frame based on recent market developments, for a total draw of $10 billion by the end of the first quarter.

In addition to the bridge loans, the company is requesting a $6 billion line of credit to provide liquidity should a severe market downturn persist. GM’s intent is to begin to repay the loans as soon as 2011. Warrants issued as part of the loans would allow taxpayers to benefit from growth in the company’s share price that might result from successful completion of the plan.

The total of $18 billion in term loan and revolving credit facilities is larger than the amount discussed during the Congressional hearings of 18-19 November, and includes provisions for a “Downside” industry sales scenario, a topic of considerable inquiry during the hearings. Once GM has completed the restructuring actions laid out in the plan, it says it will be able to operate profitably at industry annual sales volumes between 12.5 and 13 million vehicles by 2012. This is substantially below the 17 million unit industry levels averaged over the last nine years, and GM considers it to be a reasonably conservative assumption for gauging liquidity needs.

US Industry and GM Liquidity outlook in three scenarios. Click to enlarge.

In drawing up the plan, GM used three scenarios for industry sales: Downside, Baseline and Upside. GM’s Baseline industry sales projection is 12 million units in 2009—a sharp decline from 16.5 million units in 2007, and even from the 13.7 million units expected this year. GM projects the industry will recover moderately to 14.5 million units by 2011 and 15 million units by 2012.

Against the Baseline Scenario, GM would make partial use of the temporary Federal loan facilities in 2009 and 2010, with repayments beginning in 2011 and with a full pay down by the end of 2012. The company’s current Baseline projections show that GM will be profitable on an automotive Adjusted Earnings Before Taxes basis in 2011, after the restructuring actions. Assuming the lower, depressed industry volumes under the Downside scenario, GM would make full use of the $18 billion temporary Federal loan facilities through most of 2012.

Any draws would be conditioned on achieving specific restructuring requirements in a plan submitted to Congress. GM is also proposing the creation of a Federal Oversight Board to monitor and authorize draws, including timing, amounts and performance metrics consistent with the plan.

Key elements of the plan include:

• Continued shift of the portfolio to smaller, more fuel-efficient vehicles; full compliance with the new CAFE standards of the 2007 Energy Independence and Security Act; and extensive investment in a range of advanced propulsion technologies;
• Rationalization of brands, models and retail outlets;
• Reduced wage and benefit costs, including further reductions in executive compensation;
• Further manufacturing and structural cost reductions through increased productivity and employment reductions; and
• Balance sheet restructuring and supplementing liquidity via temporary Federal assistance.

Product Portfolio and Fuel Efficiency. GM says it will substantially change its product mix over the next four years, and launch predominately high-mileage, energy-efficient cars and crossovers. Key elements of the product strategy include:

• Introduction of the smallest 4-passenger vehicle on the US market, achieving higher fuel economy that the 2-passenger smart fortwo, the most fuel-efficient non-hybrid vehicle in the US market today.

• In 2009, the Plan includes seven new vehicle launches in the United States, all of which will be either car or crossover models. In 2009-2012, 22 of 24 new vehicle introductions will be cars and crossovers; 20 of these models will come from GM engineering centers having a long history of designing vehicles for markets with $6-$8 per gallon gasoline. By 2012, approximately 68% of General Motors’ car sales volume in the United States will be models derived from new, global architectures.

• In 2012, more than 50% of GM’s new vehicle sales will be flex-fuel capable.

• In addition to the six hybrids it offers today, GM will introduce the VUE Two-Mode hybrid, along with the Silverado and Sierra two-mode hybrids in 2009. By 2012, GM will offer 15 hybrid models.

• Downsizing, supported by more extensive use of turbocharging: 6-cylinder engines replace 8-cylinder units; 4-cylinder engines replace 6-cylinder units. 4-cylinder engine usage will increase by 42% by 2012, and fuel-saving 6-speed automatic transmission volume will increase by 400%, to more than 90% of GM’s US automatic transmission sales volume.

• The Volt Extended Range Electric Vehicle will launch in 2010. The company’s product plan includes additional vehicles utilizing Volt’s extended-range electric vehicle system and potentially, the assembly of battery packs in the United States.

Targeted fuel efficiency improvements during the course of the plan. Click to enlarge.

During the 2009-2012 term of the plan, GM will invest approximately $2.9 billion in alternative fuel and advanced propulsion technologies that offer fuel economy improvements ranging from 12% to 120%, compared to conventional gasoline engines. More than $2 billion of that will be applied to the main hybrid platforms offered by the company (BAS, two-mode and EREV); 26% percent of the total ($758 million) is to be applied to extended-range electric vehicles like the Volt. GM says that it will also continue to invest in hydrogen fuel cell technology.

On 17 November, GM filed its first Section 136 loan application for retooling funds (earlier post) with the Department of Energy, related to eight specific, high fuel-efficiency projects, in the total amount of $3.6 billion. Applications were made for the Chevrolet Volt, Chevrolet Cruze and Saturn Two-Mode Hybrid, which launch in the next 24 months. Applications were also made on behalf of several fuel-saving technologies, including hybrid and electric vehicle components, flex-fuel engines and automatic transmissions.

A second application, related to additional high-mileage vehicle and powertrain programs in development, is targeted for submission this week, and is estimated at $4.7 billion. In both cases, GM has made significant fuel efficiency-related investments that, as a result of having been made prior to the enactment of Section 136 funding, do not qualify for such funding.

Brands, Models and Dealerships. In the US, GM will focus its product development and marketing efforts on four core brands—Chevrolet, Cadillac, Buick and GMC—which account for 83% of current sales. Pontiac will be a specialty brand with reduced product offerings within the Buick-Pontiac-GMC channel. Hummer has recently been put under strategic review, which includes the possible sale of the brand, and GM will immediately undertake a global strategic review of the Saab brand. As part of the plan, the company also will accelerate discussions with the Saturn retailers, consistent with their unique relationship, to explore alternatives for the Saturn brand.

The plan focuses GM’s resources in the US around a smaller, more profitable set of nameplates (40 by 2012, compared to 48 today and 63 in 2004) with further consolidations in GM’s dealer network planned. From 6,450 outlets today, GM will shrink to 4,700 by 2012. In 2000, the dealer count was 8,138 outlets.

Reduced Wages and Benefits. The plan calls for further reduction in the number of executives and total compensation paid to senior leadership. For example, Wagoner will reduce his salary to $1 per year and receive no bonus for 2008 or 2009. The next four most senior officers (Executive Vice Presidents and above) will reduce their total cash compensation by approximately 50% in 2009, which includes no bonus paid for 2008 and 2009 and a 30% salary reduction for the President and COO, and 20% salary reductions for the remaining three.

The plan also requires further changes in existing labor agreements, including job security provisions, paid time-off, and post-retirement health-care obligations. The common stock dividend will remain suspended during the life of the loans.

Manufacturing and Structural Costs. GM will accelerate its current efforts to reduce manufacturing and structural costs, building on significant reductions already made over the past several years. By 2012, GM’s US employment (hourly and salaried) will be between 65,000-75,000—down from 96,537 this year, and down from 191,465 in 2000. The number of US Powertrain, Stamping and Assembly Plants will decline to 38 by 2012, from 47 this year (and from 64 in 2004). The proportion of flexible assembly plants will increase to 77% by 2012, up from 60% today, versus 22% in 2000.

GM currently has the most productive assembly plants in 11 of the 20 product segments measured by the Harbour Report, and it is a global leader in workplace safety. With the recently negotiated wage rates, turnover expected in the workforce, planned assembly plant consolidations, further productivity improvements in the plan, and additional changes to be negotiated, GM’s wages and benefits for both current workers and new hires will be fully competitive with Toyota by 2012.

With respect to the corporate aircraft that drew so much flak during the earlier Congressional hearings, GM is immediately ceasing all corporate aircraft operations, impacting approximately 50 hourly and salaried employees. GM is currently exploring options for transferring the aircraft to another charter service operator and/or pursuing disposal of the aircraft. These actions are in addition to recently announced decisions to reduce the total number of corporate aircraft.

Balance Sheet Restructuring. Under the plan, GM would significantly reduce the debt currently carried on its balance sheet. GM plans to engage current lenders, bond holders and its unions to negotiate the needed changes. GM’s plan would preserve the status of existing trade creditors and honor all outstanding warranty obligations to both dealers and consumers, in the US and globally.

Resources

• Restructuring Plan for Long-Term Viability (2 Dec 2008)