The US House of Representatives yesterday passed HR 7321, the Auto Industry Financing and Restructuring Act, by a vote of 237 to 170 (largely along party lines). The legislation, worked out with the White House, provides up to $14 billion in short-term bridge loans for the auto industry, laced with a number of restrictions and controls.
The legislation now goes to the Senate for consideration, where it faces considerable Republican opposition. The White House is urging passage.
If enacted, the bill calls for the President to designate a “car czar(s)”—one or more individuals—to carry out the requirements of the Act and hold the car companies accountable for implementing their long-term restructuring plans. The designee has veto power over industry expenditures in excess of $100 million, and allocates the funds on a priority basis to protect the economy.
The $14 billion is to be taken from the Section 136 funds already approved for retooling to produce fuel efficient autos. (The act reserves $500 million in credit subsidy for Section 136 loans, and authorizes additional appropriations to replenish Section 136 funds.)
No new funds will be available for bridge financing after the President’s Designee approves the automaker’s restructuring plan. The President’s Designee must establish by not later than 1 January appropriate measures to assess the progress of each automaker in developing a restructuring plan, and must evaluate the progress of each automaker against those measures in 45 days.
Automakers must submit by 31 March 2009 a restructuring plan to achieve long-term viability, international competitiveness and energy efficiency, including repayment of government financing, compliance with applicable fuel efficiency and emissions requirements, achievement of positive net present value, rationalization of costs and capacity, and proposals for restructuring existing debt. The designee may provide financial assistance to an automaker to implement an approved restructuring plan.
If the President’s Designee (PD) determines that adequate progress is not being made to reach agreement on a restructuring plan, the President’s Designee will submit to Congress his own plan to achieve long-term viability for the automaker.
The restructuring plan will not be approved unless the PD determines that the plan will result in the ability of the automaker to comply with applicable fuel efficiency and emissions requirements. In addition, the PD may accelerate repayment of a loan or cancel other financial assistance if the automaker fails to comply with applicable fuel efficiency and emissions requirements after 31 March 2009.
The bill outlines a number of “taxpayer protections” including:
Warrants. The PD may not provide any loan to an Automobile Manufacturer unless he or she receives from the automakers warrants for non-voting common stock or preferred stock equal to 20% of the loan amount. In Chrysler’s case, the government will receive warrants or the economic equivalent of warrants in Chrysler’s holding company or in Cerberus, the company that controls a majority stake in Chrysler.
Executive Compensation. All executive compensation restrictions of TARP apply to automakers receiving financial assistance for the duration of that assistance, plus: (1) no bonuses or incentives to 25 most highly paid employees; (2) stringent prohibition on golden parachutes; and (3) no compensation plan that could encourage manipulation of reported earnings to enhance compensation.
Dividends. Automakers receiving financial assistance (including any holding company in case of Chrysler) generally may not pay dividends, distributions, or their economic equivalent for duration of the assistance.
Super Seniority. All other obligations of any automaker receiving loans (or in the case of Chrysler, Chrysler’s holding company or Cerberus) will be subordinate to those loans to the extent permitted by the terms of such obligations in effect as of 2 December 2008. The automaker will pledge all available security and collateral against the loans.
Discharge. In the event of a subsequent bankruptcy of an automaker, the debts to the government from the financial assistance will not be dischargeable.
Aircraft. An automaker must divest and may not own or lease any private passenger aircraft while financial assistance is outstanding.
If an automaker fails to submit a restructuring plan that can be approved by the PD within the time provided by the Act, the loan will be called in 30 days, unless a restructuring plan is approved within that period.
In terms of oversight, the Act stipulates provisions similar to GAO and Special IG oversight provisions of TARP apply, plus the explicit grant to GAO of access to automakers’ records (including records of any subsidiary, affiliate, or majority stakeholder in case of Chrysler/Cerberus). There are extensive reporting requirements from GAO, Special IG, and the PD to Congress.
The PD is to prioritize allocation of financial assistance to automakers:
For bridge loans, based in order on (1) necessity of the financial assistance, (2) potential impact of failure of the Auto Manufacturer on the US economy, and (3) ability to utilize the financial assistance optimally.
For any long-term financial assistance, based in order on (1) ability to utilize the financial assistance optimally, (2) potential impact of failure of the Auto Manufacturer on the US economy, and (3) necessity of the financial assistance.
The loans have a 7-year term (or longer as may be determined by the PD). The interest rate is 5% for the first 5 years and 9% thereafter. There is no prepayment penalty. For the duration of the loan, the PD may review and prohibit any asset sale, investment, contract, or commitment proposed to be entered into by the automaker valued in excess of $100 million if inconsistent with or detrimental to long-term viability.
The PD may accelerate repayment of a loan or cancel other financial assistance of an automaker if (1) the PD determines that the automaker has failed to make adequate progress towards developing a restructuring plan, (2) the automaker fails to submit an acceptable restructuring plan or fails comply with any other applicable condition or requirement of the loan program, or (3) the automaker fails to make adequate progress in the implementation of an approved restructuring plan.
Each automaker is also to analyze the potential use of excess production capacity to manufacture vehicles (including buses and rail cars) for sale to public transit agencies. The Act also includes provisions to guarantee leases of qualified public transit agencies.