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G.M. Is Said to Soon Begin Paying U.S. Debt

November 16, 2009

G.M. Is Said to Soon Begin Paying U.S. Debt

General Motors, which emerged from a government-ordered bankruptcy restructuring earlier this year, will begin paying back its debt to the United States and Canadian governments earlier than expected, a person with direct knowledge of G.M.’s plans said Sunday night.

The company, which received $50 billion in government financing to avoid collapse, will make its first payment of $1.2 billion toward $6.7 billion of senior debt at the end of December, this person said on the condition of anonymity. About 85 percent of that will be paid to the United States government, and 15 percent to Canada.

Of the $1.2 billion, $1 billion will go to the American government and $200 million to Canada. G.M. will continue the payments in each quarter thereafter, until that debt is repaid.

Of G.M.’s bailout package, an initial $13.4 billion was money made available, with strict conditions, in December by the Bush administration under the Troubled Asset Relief Program.

G.M. received about $6 billion more in working capital from the Obama administration in April and May, and was given $30.1 billion in bankruptcy financing and postbankruptcy restructuring money, for which the government received a majority stake in the new version of G.M. that emerged from bankruptcy.

Of the total, only the $6.7 billion, most of it provided by the United States, was considered a loan that required repayment. The rest was money traded for equity in the company.

G.M. did not have to pay back the loan until July 2015, and the government did not expect to receive the money before then, the person said.

On Monday, G.M. is to report its first financial results since emerging from bankruptcy protection in July. The early debt repayment could be an indication that G.M.’s financial condition is strong enough that it can begin parting with the government money.

In a sense, G.M. is merely returning federal money that it was given as a cash reserve as it got back on its feet.

When it emerged from bankruptcy, G.M. received $16 billion in cash from the governments in order to restart its operation. It is repaying the $6.7 billion using that cash, whose uses are restricted. The early repayment will save G.M. much of the interest on that debt.

Under the terms of the loan, the United States owns 60.8 percent of G.M., and Canada and Ontario hold 11.7 percent, in return for $10.5 billion in financing. The United Automobile Workers union holds 17.5 percent through its retiree health care fund, with an option to take more of G.M. Bondholders have the remaining 10 percent.

G.M.’s board approved the repayment to the government, the person with knowledge of the situation said, after discussions with the Treasury Department.

Although the cash was available to G.M., the person said the repayment was not a sign that G.M.’s problems were over. “They are not out of the woods yet,” the person said.

G.M. sought bankruptcy protection on June 1, after its efforts to reorganize outside of court were deemed insufficient by the Obama administration.

G.M. emerged from bankruptcy protection on July 10, much faster than administration officials, legal experts and automobile industry analysts believed was possible.

Its swift exit from bankruptcy played a major part in G.M.’s ability to repay the money now, the person with knowledge of G.M.’s plans said. “Absolutely, the company and the government were both planning for a longer period,” the person said.

There were three primary reasons that G.M. was able to repay the money, this person said.

Before G.M. sought bankruptcy protection, its former chief executive, Rick Wagoner, warned repeatedly that buyers would be reluctant to buy cars from a company in Chapter 11 protection.

Mr. Wagoner stepped down in March at the request of the Obama administration and was replaced by Fritz Henderson, now G.M.’s chief executive. Even after the change, both federal and company officials continued to fear that G.M.’s bankruptcy might cause its sales to fall by as much as 50 to 60 percent.

But sales did not fall as much as expected while G.M. was in bankruptcy, in part because the government offered to back the warranties of G.M. vehicles bought while the company was under court protection. Its better sales meant G.M. did not have to draw as much on the government’s cash.

At the same time, industry sales, which are at their worst levels since the early 1980s, also were not as weak this summer as the company and the government anticipated when G.M.’s business plan was drafted.

One reason was the “cash for clunkers” program, under which the government provided rebates of up to $4,500 for people who traded in old cars. That lifted auto sales in July and August, sending buyers to showrooms just as G.M. needed them most.

Further, G.M.’s network of parts suppliers was not disrupted during the bankruptcy, as was expected by the company and the government, the person with knowledge of G.M.’s plans said.

G.M.’s board has said it wants to pursue an initial public offering of stock in the second half of 2010.

Should G.M. continue paying $1.2 billion each quarter on the senior debt, that would mean repayment of about half of that liability by then, the person said.

Presumably, the money raised through the offering could be used to repay the remainder of the senior debt.


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