GM's Use of Bailout Money: What Else Aren't They Telling Us?

What else haven’t they told us? The WSJ is reporting that GM plans to use some of the $30 billion of DIP loans it’s set to receive from the Government to finance the the leveraged buyout of auto-parts company Delphi. This transaction is part of the GM viability plan that the government’s auto task force and GM jointly created. In other words, the Obama administration has known about this from the get go.

From the WSJ:

GM will provide more than $2.5 billion of the $3.6 billion necessary for Beverly Hills-based buyout firm Platinum Equity to gain control of Delphi, according to a person familiar with the matter.

Since Monday, GM and the government have been mum about who would provide the money to help Delphi emerge from bankruptcy. A GM spokeswoman wouldn’t comment on specific figures but noted in a statement that funding for the Delphi buyout was “incorporated into GM’s revised viability plan.”

GM’s involvement represents new ground in its use of government support. The Obama administration has begun to use private-equity firms to take over failed banks but has yet to use them in the auto industry.

Such transactions can prove hugely profitable for a buyer, depending largely on financing costs and the buyer’s ability to turn around the business.

Under the terms of the transaction, Platinum is expected to invest no more than $750 million, according to the person familiar with the deal. GM would provide the balance in financing.

Those financing commitments may or may not be drawn upon in the future, depending on how Delphi performs. The terms of the GM loans couldn’t be learned.

As part of the deal, GM is buying back four Delphi plants and Delphi’s Saginaw, Mich., global steering division. In addition, it’s providing a $250 million loan to fund Delphi’s operations while it remains in Chapter 11.

The Delphi rescue is a turnabout for GM. Delphi has languished in bankruptcy court for nearly four years, and it has been an enormous cash drain on GM. Earlier this year, GM said it wasn’t interested in propping up the auto-parts maker any further.

I guess we have to label this a backdoor, leveraged bailout of Delphi. The administration is getting pretty good at financial engineering, aren’t they? But really, what gives here? We were told that one of the reasons so much of the taxpayers cash going into GM was going to end up as equity was to ease the cash flow burden on the company once it emerges from Chapter 11. Now they turn around and propose using that precious cash to layer debt on a parts manufacturing company.

If GM couldn’t handle much leverage, why is it possible that Delphi can? Their cash flow dynamics surely aren’t that much different from GM’s, in fact I would venture to say that they must be downright unpredictable given that their business is subject to the whims of manufacturers’ production scheduling.

Delphi has been languishing in Chapter 11 for over four years. That is more than enough time for a whole host of buyers to have kicked the tires and figured out whether it was worth anything. Presumably it’s been found wanting until now. If private capital couldn’t make a case for acquiring the company during that period what is it that has changed and brought about this turn of events.

Right now there are more questions than answers. The answers need to be forthcoming very quickly. I just don’t think that the prospect of GM laying off workers, shuttering plants and sticking knives in the backs of thousands of its dealers while it uses public assistance to facilitate a leveraged buyout of a bankrupt parts supplier is going to go down very well.

Comments

[Mono:]

tom-

great read. the audacity GM has seems to be too great. i mean...i literally can't believe it. must be something more to it. if not- im just confused as to how expansion (new company shell or not) continues. and the wonder how we find ourselves in a liquidity trap.

at least mortgage rates didn't climb to 5.29 from 4.91 in about a week.....oh wait

Jun 05 11:55 AM

[billddrummer:]

Well, they could use some of the money they'll get from selling Hummer and Saturn--oops, forgo that the Hummer deal may not close, and the Saturn deal isn't cash.

Sorry.

Jun 05 06:21 PM

[Deweyp:]

Delphi is a major supplier to GM and as such is critical to the survival of the "New GM". No one in the Obama administration or at GM is trying to hoodwink the American people with underhanded moves as you suggest. The dealerships that are being cut were not as viable as some would have you believe. Fewer dealerships means higher volume at those who remain and better pricing to the ultimate customer making GM more competitive with the Asian brands. There is a reason why a product at Walmart is less expensive than at the small corner store.

Jun 06 09:07 AM

[Leftfield:]

Delphi is UAW. The taxpayers will end up shelling out over $100 billion for GM eventually, if things go well. It's a whole new world. Except the lying by politicians. Earlier bankruptcy with some aid to cushion the blow would have been far cheaper and a truly viable GM could have emerged. Here we have the halls of smoke and mirrors consuming GM as yet another vehicle for payoffs and underhanded political dealing.

Jun 06 09:27 AM

[a. palmer jr.:]

I think I'll look for Ford products from now on.

Jun 06 06:56 PM

[Windsun33:]

It is not just GM, the politicians - such as Barney Frank - have already started meddling in what locations to close or not close. This is starting to look like a typical military aircraft contract, where the plane that the Air Force gets is based more on whose district will get pork than what actually works.

As some blog that I came across a couple days ago noted - GM and Chrysler might well be Obama's version of Bush's Iraq.

Jun 06 09:41 PM

[Diegojames:]

Demotroit is going to get FAT along with GM, B.Frank(who is already fat) or fatter. Obviously the democratic party will own the transportation industry- except for Ford.

GM, UAW-Autopart companies will be told what to build.

I own BP(buying more)and a small amount of CVX(not buying)and F-Ford because Congress will force HYBRID cars on the USA . Internationals oils will do well and Ford is nimble enough to survive by designing , strategic plans and the trust of American car shoppers.

Jun 06 10:40 PM

[mike smitka:]

Without Delphi remaining in operation, not just GM but every OEM in North America will have problems. Since their 1999 spinoff from GM they've gradually diversified their customer base. For example, for certain components (steering columns) Ford is highly dependent on Delphi (though I should add this is one of the pieces that GM is buying back, to guarantee it stays in business). And it's not just Delphi that's the issue: supplier failures threaten the entire industry, because they supply multiple OEMs, because the industry operates on a just-in-time basis, and because finding alternate suppliers in a short time frame is almost impossible (under 3 months, given testing requirements).
— mike smitka

Jun 07 07:45 AM

[TomWilkinso...:]

Sorry, this post is a little bit of "fire, ready, aim." The potential for GM support for Delphi's emergence was discussed on page 33 of GM's February 17 viability plan, and has been a subject of discussions with the Task Force ever since. There are plenty more details in the 8-K GM filed on June 5. So to imply that all of this is a dark conspiracy is just plain wrong -- it's there, online, in documents filed with the SEC and posted on the GM Investor website.

Jun 08 01:49 PM

[Detroit III:]

It isn't like this is a big secret...GM needs Delphi to stay afloat for the time being until it emerges from bankruptcy. Like it or not, it's a real issue that has to be dealt with. Letting them fall would result in widespread collapse of Delphi, its Tier 2s and Tier 3s and all the people at those companies. Supporting the sale of Delphi is part of GM's basic operational needs - and at least an end to the Delohi matter is now in sight.
- Detroit III

Jun 08 01:56 PM

[Tom Lindmark:]

There are two issues here. One is the support for Delphi and the other is the manner in which Delphi is being supported.

It was always a foregone conclusion that Delphi would be bailed out in some manner. That's not in dispute nor is it the point of the article.

The use of government funds to support a leveraged buyout of Delphi is the issue that troubles me. If it was necessary to "save" Delphi, it would have seemed more appropriate to do it head on and reserved the profits, if they ever materialize, for the government. This appears to be an out and out government subsidy for a PE firm.


On Jun 08 01:49 PM TomWilkinsonatGM wrote:

> Sorry, this post is a little bit of "fire, ready, aim." The potential
> for GM support for Delphi's emergence was discussed on page 33 of
> GM's February 17 viability plan, and has been a subject of discussions
> with the Task Force ever since. There are plenty more details in
> the 8-K GM filed on June 5. So to imply that all of this is a dark
> conspiracy is just plain wrong -- it's there, online, in documents
> filed with the SEC and posted on the GM Investor website.

Jun 08 02:15 PM