David Shepardson / Detroit News Washington Bureau
Washington -- General Motors Co. will announce today it will begin repaying its $6.7 billion in government loans ahead of schedule -- a sure sign that the Detroit automaker's finances are improving since its exit from bankruptcy in July.
But GM also will admit it continues to face significant challenges -- especially in North America and Europe, where it is still losing money -- when it releases its third quarter earnings this morning in Detroit.
GM's board of directors and the U.S. Treasury approved the repayment plan that will begin with a $1 billion payment Dec. 31, a person with knowledge of the plan said Sunday night. GM will make payments of about $1 billion every quarter, at least until the second half of 2010, the earliest that it plans an initial public stock offering.
GM also will make $200 million quarterly payments to the Canadian national and Ontario provincial governments against its $1.4 billion debt. The schedule means that at a minimum, GM will have repaid about half of its debt before it goes public.
The formula for calculating GM's interest rate is complicated, but it is a minimum of 7 percent. According to this repayment schedule, GM would pay slightly over $1 billion in interest on its U.S. loans.
GM Chairman Edward Whitacre Jr. said last week in a speech in Texas that the company felt a "sense of urgency at GM to repay the money we owe as soon as possible," and said the company could begin repaying the loans this year.
"We can pay that back, and I can't tell you when, but it wouldn't be very long and it is sooner than you think," he said.
GM had been required to repay the loans by July 2015. GM's early payments were prompted by the company's desire to show taxpayers it is eager to make good on its covenant with them, and convince them to try GM vehicles again, or for the first time.
The automaker received a $49.9 billion U.S. government bailout -- with $13.4 billion from the Bush administration, the rest infused by the Obama administration, which forced the company into bankruptcy in June.
Modestly ahead of plan
The U.S Treasury swapped about $43 billion of the loans for a 60.8 percent equity stake in GM; the Canadian federal and provincial governments hold an 11.7 percent equity stake in GM in exchange for most of their $10.5 billion in loans.
As a result, the Government Accountability Office, the Congressional Oversight Panel overseeing the $700 billion Wall Street and auto bailout fund, and former White House auto czar Steve Rattner all agree that taxpayers have lost billions in their investment -- because the stock won't be worth enough to cover the government's investment.
Rattner said taxpayers have probably lost about $25 billion.
GM is modestly ahead of its financial plan, in part because it emerged from bankruptcy after only 40 days -- shorter than the 60-90 days predicted by the company and the Obama auto task force.
It also got a boost from the federal "cash for clunkers" program.
The program helped GM's sales performance, which has been ahead of what the company forecast internally.
GM declined comment Sunday night, but didn't dispute the reports.
The Detroit automaker will use unspent taxpayer loans to repay the government, though it is a shift from prior suggestions made by executives.
When GM exited bankruptcy through the sale of most of its assets to a new company, the U.S. Treasury gave the new company $16.4 billion in exit financing that was placed in "escrow" or in what GM refers to as a "restricted cash account."
GM needs the government's approval to spend from that account.
GM has spent $3 billion, largely to cover obligations to its former parts unit Delphi, leaving $13.4 billion, which means its outstanding government loans could eat up most of the remaining funds.
The board's decision is a shift from what GM's chief financial officer, Ray Young, suggested in interviews in July.
Young, who is expected to move to a new role in GM in international operations by Dec. 31, told Reuters Television in July that the company was considering issuing new shares of stock in 2010 to pay off some of the debt.
Young said GM might prepay some of its looming pension obligations, rather than use the funds to repay taxpayers.
Pensions still an issue
GM forecasts it will need to make $12 billion in pension payments over two years, starting in 2013, to shore up its underfunded plans.
GM's pensions were underfunded by $12.7 billion as of Dec. 31.
"Some of our options would include looking at whether it makes sense for us to put some money into the pension plan this year. That's something that we're going to analyze over the next several months along with the new GM board," Young said.
Despite the early repayment, GM is not out of the woods yet. It faces a difficult auto market and a weak economy.
"From the U.S. government's perspective, there is still a long way to go in GM's difficult and challenging restructuring," a person with knowledge of the situation said Sunday. GM "will need to execute over the next several months and years."
Erich Merkle, an auto analyst at autoeconomy.com, said GM's repayment move is smart, and aimed at changing the public's perception.
"GM wants to show that they are a good steward of the taxpayers' money, and this is a good first step," Merkle said Sunday.
$88B lost since 2004
GM isn't expected to announce any additional job cuts or plant closings today, but it will offer its first detailed post-bankruptcy financial picture.
GM has lost $88 billion since 2004.
A year ago, GM posted a $2.5 billion third-quarter net loss and said it had $16.2 billion in cash, securities and readily available assets.
When GM released third-quarter results last year, the automaker reported a net loss of $4.45 a share and said its revenue fell to $37.9 billion.
GM has not released quarterly financial results since the first quarter, when it posted a $6 billion loss.
GM spent the first 10 days of the third quarter in bankruptcy court before its assets were sold to a new company -- another reason the results released today will be incomplete. GM, which is not a public company, warned that its third-quarter results will not follow U.S. accounting principles.
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