America’s Automakers And Their Debt

December 2, 2008

With another meeting planned with Congress coming upon December 2, the CEOs of the nation’s three big auto makers will try to convince the legislative body to accept their plan for a $25 billion bridge loan. The loan proposal comes with promises that each auto maker is in the process of restructuring operations to ensure increased profits once the economy regains its momentum.

Although there is talk among industry and congressional insiders about moves by CEOs of General Motors, Chrysler, and Ford to provide assurances of their sincerity regarding necessary changes, essentially symbolic gestures like cutting use of corporate jets and executive pay reductions are falling flat. The seriousness of the debt load that the companies are trying to manage will require the use of far more substantial measures to save money.

Billions of taxpayer dollars will be allocated to the Detroit carmakers for investment purposes by Congress. This means that lawmakers need to have a clear grasp of the prospects for survival may be for them should the bridge loan help them ride out the downturn.

All three companies are currently carrying enormous debt and interest payments that will put a drain on their research and development resources. This could be the death knell for the companies since they really need to develop and market new vehicle models to take advantage of reviving markets.

Much of the debt amassed by the auto makers over the last few years has been centered on things like pension plan funding, employee buyout deals, plant closures, and the organization of a union-led health-care trust that will be administered by the UAW.

The final source of debt could have a silver lining once the economy is revitalized. The union health-care trust may be a way for the company to make profits. Also known as a voluntary employee benefits association, it has the potential to save $4.8 billion annually.

Profits are what will make the difference for the automakers. If profits improve, the debt load can be managed without threats to the stability of the companies as a whole. In the companies develop schemes to save money where they can and allocate resources effectively, they might survive.