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FINANCIAL CRISIS : GM TO PAY OFF LOANS EARLY : The automaker says it could be out of debt to the U.S. and Canadian governments by June.

November 17, 2009|Ken Bensinger

Borrowing a page from the playbooks of Bank of America and Goldman Sachs, General Motors Co. is moving to repay its federal loans early.

The bailed-out automaker announced a third-quarter loss of $1.15 billion Monday, but it said its cash flow had been strong enough to allow it to pay back $1.2 billion to the U.S. and Canadian governments next month.

The better-than-expected performance, GM executives said, came in part because of sales growth in developing markets such as China, as well as large cost reductions taken during its trip through bankruptcy over the summer.

"We have significantly more work to do, but today's results provide evidence of the solid foundation we're building for the new GM," said Chief Executive Fritz Henderson, who said that GM planned to make quarterly payments to its creditors with an eye on completely repaying those debts years ahead of schedule.

In fact, Henderson said, the automaker could pay off all its government loans by June, while at the same time staying on target for an initial public offering in the second half of next year.

Industry analysts, however, were quick to criticize the financial soundness behind a decision to pay back large, low-interest loans at a time when the automaker is still losing money at an alarming rate.

Instead, some speculated, the move could instead be focused on public relations -- an attempt to put a confident face before an unconvinced public.

Since GM borrowed $52 billion from Washington, the company's share of the U.S. market has dropped to 19.7% through October, compared with 22.1% a year earlier, signaling the difficulties it has had in drawing customers. Meanwhile, rival Ford Motor Co., which did not take federal funds, has gained share.

"GM's announcement that it will begin to pay off its government loans earlier than anticipated can only help persuade reluctant consumers to consider GM vehicles, but loan repayment and any goodwill derived from it can go only so far," said Edmunds.com analyst Michelle Krebs.

Others suggested that the advanced payment schedule was less a question of public image than getting out from under the heel of Uncle Sam.

Like the banks that received billions from the Treasury Department's Troubled Asset Relief Program, GM has been subjected to close oversight -- and at times direct intervention in corporate affairs -- from Washington.

In October, the administration announced plans to dramatically cut salaries of executives at bailed-out firms, including GM, which has a salary cap of $500,000 for any executive other than Henderson. Last week, GM's new chairman, Ed Whitacre Jr., said in a speech that the salary caps were making recruiting and maintaining talent more difficult.

"To find top-level people where you need them, that's a more difficult thing to do at that salary level," Whitacre said.

GM has suffered a number of key departures in recent months, including its head of marketing, Mark LaNeve, and Bob Kruse, who had headed the automaker's electric-car development program.

"I see this as GM trying to get government restrictions out of its hair as soon as possible," said Aaron Bragman, industry analyst at IHS Global Insight.

Regardless of the motivation, GM indicated on Monday its intention to clear its books of debt as soon as possible.

The automaker reported $17 billion in outstanding debt at the end of September, compared with the almost $95 billion it had when it filed for Chapter 11 bankruptcy protection in June.

Revenue for the most recent quarter, including the tail end of GM's sprint through bankruptcy, was $28 billion, down significantly from a year earlier when it brought in $37.9 billion and had a net loss of $2.5 billion.

In North America, GM lost $651 million on operations, while its international units collectively earned $238 million for the period. GM also spent $500 million on restructuring costs in the third quarter, much of it dedicated to staff reductions and plant closures.

But GM hastened to point out that the latest numbers were an improvement from the second quarter of this year, when revenue was just $21 billion. And since GM took steps in bankruptcy to shed several brands, close factories and significantly reduce its workforce, the company is in many ways radically different from what it was a year ago.

Still, if the quarterly loss was not as bad as some analysts had feared, it was hardly stellar, especially in light of the recent strong results from top competitors.

This month Ford posted a $1-billion profit for the quarter, and Toyota Motor Corp., in an earnings surprise, reported profit of $240 million.

Even if GM does pay back all its federal loans on such an advanced schedule, taxpayers could still take a big loss on the company. Of the $52 billion the federal government lent GM, only $6.7 billion remains on the books as debt, with most of the total having been either forgiven or converted into equity in the company.

As part of the Chapter 11 process, GM ceased to be a publicly traded company. Shares in the former General Motors Corp. are tied to a new entity, Motors Liquidation Co., which remains in Bankruptcy Court along with the so-called bad assets that GM elected not to keep.

The U.S. government is now the largest stakeholder in privately held GM, with a 61% position, and has announced plans to sell off its shares -- once they become public -- as quickly as possible.

But a report out this month from the Government Accountability Office predicted that it was doubtful the full amount lent to GM, as well as to Chrysler, would ever be repaid.

To do so, the report said, GM's market capitalization would have to rise 20% above its all-time high, a daunting task in what continues to be the worst auto market in a quarter of a century.

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ken.bensinger@latimes.com

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