Editorial: How to Give GM DOE Loans AND Protect Taxpayers

Robert Farago
by Robert Farago

[Another one from our anonymous bankruptcy lawyer.] I’ve had a look at the rules for the $25b Department of Energy (DOE) direct loans for development of advanced technology and manufacturing facilities. To qualify, an automaker must prove that it is solvent. Either that or it must meet one or more of the stated tests that relate to financial liquidity– tests that can be met even if the automaker is insolvent on a balance sheet basis. In announcing its huge third quarter loss, GM has made a statement that suggests that it may not meet the liquidity tests and may not qualify for the DOE direct loans.

GM is balance sheet insolvent to the tune of $59b. So perhaps GM could persuade the DOE to consider their projected cash flows for the next few years as an indication of ability to repay. But the automaker hasn’t released its pro forma projected cash flow statements or given any indication how they will meet the loan eligibility tests enumerated in the DOE interim rulemaking.

Based on what we know about GM, its recent losses, and its obligations in 2009 and 2010 to repay billions in unsecured debt (the $1.3 billion unsecured Series D convertible debt due on June 1, 2009) and fund the retirees’ health plan trust administered by the UAW, GM will need to have the liquidity standards relaxed to qualify for DOE loans. If the DOE does so, it should do it in a way that protects taxpayers.

The starting point: find a way to meet the DOE’s solvency/liquidity requirements. This might be done using a (get ready for this fans of The Jerk) capitalized special purpose entity (a.k.a.“SPE”). An SPE is a separate legal entity, often organized under the laws of Delaware. GM and other companies already use SPEs to finance specialized assets. To qualify for the DOE loans, the SPE would have to be solvent or adequately liquid. Solvency/liquidity could be created in a few ways.

Automakers already have budgets/projected expenditures for alternative technology vehicles. As a starting point, GM, Chrysler and Ford would each make a capital contribution of $500m to the SPE, and then would make quarterly payments to the SPE as additional capital contributions. This would give the SPE significant liquid/current assets and help assure taxpayers that the automakers’ ability to divert the DOE loan for other purposes is limited.

The DOE proposes it get a first lien/security interest in all property acquired with loan funds. However, this approach does not adequately protect taxpayers; the security interest does not extend to existing assets/technology that may be an integral part of the technology being developed.

Therefore, any automaker seeking DOE loans should be required to transfer all existing intellectual property, patents, trademarks and technical know-how in any way relating to alternative technology vehicles to the SPE. These transfers would give the SPE more assets, helping it meet the ongoing test for solvency and liquidity. Any new technical advances and the related intellectual property for alternative technology vehicles would be owned by the SPE.

The SPE would grant any participating automaker a non-exclusive, nontransferable license to use all the intellectual property owned by the SPE. Any loans by the DOE would be the primary obligation of the SPE as the borrower, guaranteed by the automakers and secured by the stock of and the assets of the SPE. The SPE would control how the DOE loan is disbursed and monitor the use of the money.

Having demonstrated their incompetence, automakers should not be allowed to run the SPE. The SPE should have an independent board of directors with its own scientific advisors, charged with the obligation of eliminating duplicate alternative technology development efforts. The SPE would have a detailed budget open to public inspection and comment, with a website which it posts detailed quarterly financial statements showing the use/disbursement of taxpayer funds.

The purpose of the orginal legislation was clear: funding new, fuel-saving automotive techology and products. Money from the DOE should not be used, directly or indirectly, to prop-up automakers that are failing, or to fund automaker obligations to creditors and bondholders. By using an adequately capitalized SPE, GM– and Ford and Chrysler– can qualify for DOE direct loans without endangering federal funds. In the event of a Chapter 11 filing by one of the automakers, having the DOE-funded assets in the SPE assures taxpayers that their investment in advanced technology will have priority. The money will be protected.

Robert Farago
Robert Farago

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  • Joeaverage Joeaverage on Nov 12, 2008

    Toyota won't build EVs anytime soon for several reasons. One would be that the last time they built an EV - the RAV4-EV they got sued by Chevron to the tune of $30M because GM sold the NiMH battery tech (Cobrasys) to Chevron after Toyota was already building vehicles using it. Big investment only to be told that the battery tech is now off limits. Gov't wants to put people back to work? How about exercising eminent domain and seizing the NiMH battery patents and making them public domain? They'd certainly take your house or mine for a highway... The Lithium batteries might carry more electrical capacity but they are fragile and they age whether they are being used or not. The NiMH batteries just go and go and go. Over 150K miles on the original batteries in the RAV4-EV and still going strong. They are good enough that a reasonable sized battery pack can push a normal CUV over 100 miles per charge and it comes with the usual bells and whistles like a/c. No special chassis and bodywork required (see EV-1). That means car makers could more easily base their EV off of existing vehicle designs, not some special high priced two passenger rollerskate. Lower cost vehicle... That also mean you could buy a gasoline powered Astra AND an electric Astra - your choice. Note that Cobrasys was by then I think owned by Chevron. There is another story that Toyota was allowed into a formerly domestic only trade association as a consolation prize. I'm sure that groups like that have their own lobbyists and agendas that they promote together. I have to wonder if groups like that don't stifle innovation more than they encourage it. The association's members go forward in locked steps - no one ever getting too far ahead of anyone else. This I can't prove but I'd love to hear from someone who could.

  • Joeaverage Joeaverage on Nov 12, 2008

    I am concerned that the recent drop in fuel prices are intentional - to stomp out the EV competition that was rising with the high price of gasoline. Short of a wire-tap how could anyone ever prove it? We need innovation. I don't think the Detroit three can provide it. Oh they'll release something different every once in a while but they won't put their support behind it - nothing that alters America too much. The engineers might really put their sweat and tears into it but I expect the leadership will let anything too far out whither on the vine. Too weird. Too hard to service. Too hard to make money on. Makes the customer too independent of their dealership network. Customer needs to feel compelled to replace their vehicle every 5 years or so because either it wears out, gets too expensive to repair, or goes out of fashion. No thanks. I'll stick to my 166K mile 9 year old Honda or my 155K mile 11 year old VW. Guess whose products I'll buy next time? We need innovation and Detroit's leadership don't even seem to react to their impending corporate failures. More reasons to think their slide to bankruptcy is intentional to shed old weight like debt, unions, excess dealers, etc. Giv emoney to Detroit? Absolutely NOT. Let them go broke, reorganize and rise from the ashes a leaner more agile entity. Do I want to deal with the massive unemployment that will result? No. We've already got 1.5M people out of work now (as of last weeks headlines). Maybe though this will be a lifechanging event that straightens out our politics, our businesses, and our society. I don't think anything but a catastrophic event will straighten out our political or business leadership. More federal debt certainly won't do it unless you want to give everybody $50K to spend on their debt or to buy new cars. Imagine the inflation that would trigger though. The greedy people would lineup on Main Street with their hands out and with inflated prices on everything. It would be just like the parasitic businesses around military bases. We know how much money you have and we'll adjust our prices so we get all of it while you in your ignorance will think you are getting a cool product at a good price.