Editorial: How to Give GM DOE Loans AND Protect Taxpayers
[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.
More by Robert Farago
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