Analysis: New loans would help GM on fuel efficiency

A GM sign is seen outside the Medved General Motors car dealership in Arvada, Colorado August 12, 2010.

WASHINGTON (Reuters) - General Motors Co (GM.N) is in the running for up to $10 billion in government loans to produce fuel efficient cars, and accepting the money would make sense even if it adds debt and new financial ties to Washington.

Automotive, environmental, financial and policy experts say the low-interest Energy Department financing, likely to be approved for GM early this year, is essential for helping the automaker battle U.S. and overseas rivals on fuel efficiency.

"I would say GM has the room to take it on," said Sean McAlinden, director of economics at the Center for Automotive Research in Ann Arbor, Michigan.

"These are very low interest loans and can beat anything they can get in the capital market," he said. "The loan money will be repaid."

GM declined to comment when asked about the loan application, submitted before its 2009 government-orchestrated bankruptcy and reworked after its emergence with the Treasury as its majority stakeholder.

Department of Energy (DOE) officials said discussions are continuing on financing terms. The Treasury, which halved its equity stake in GM to a third in the automaker's record public offering, would not comment.

GM's $10 billion loan application does not include a related $4 billion bid from parts supplier Delphi, a former GM unit and now a private company.

GM's signature advanced technology project is the mainly electric Volt plug in car, which began shipping last month. It also plans to use the DOE financing for gasoline-electric hybrids.

Experts interviewed by Reuters noted that Ford Motor Co (F.N) accepted $5.9 billion in Energy Department loans in 2009. Ford, unlike GM and Chrysler, did not receive a government bailout.

Ford got a sales boost for resisting massive aid and suffered no consumer or investor backlash from taking the DOE credit.

Nissan Motor Co (7201.T) also received $1.4 billion in related loans to help with production of its all-electric Leaf.

"Loan guarantees are actually a great way to leverage taxpayer dollars to get a lot without costing much," said David Friedman, research director of the clean vehicles program at the Union of Concerned Scientists. "We need these companies to build electric (cars), batteries, fuel cells, and cast aluminum parts."

SHEDDING 'GOVERNMENT MOTORS' LABEL

Taxpayers extended GM $50 billion and facilitated the company's bankruptcy last year. Through the share offering and other repayments, the government has recouped about half the total.

GM has thanked taxpayers through statements and TV ads, but executives are eager to shed the "Government Motors" label. Investors also want government out of GM's affairs and have responded positively with the Treasury casting a smaller shadow and GM performing well and forecasting brighter prospects.

GM shares rose 0.4 percent to nearly $39 on the New York Stock Exchange on Friday, 18 percent above the $33 November IPO price.

New GM chief executive Dan Akerson is adamant about cost control. Akerson wants zero-debt and the ability to maintain capital investment during any sales volatility.

"We have to have a robust fortress balance sheet," he said last month, adding that GM has about $4 billion in debt, down from $26 billion pre-bankruptcy.

Akerson also notes GM is investing billions in technology and heavily promotes electric vehicles and other products needed to meet tougher government efficiency standards.

"This company takes so much investment and development," he said.

GM has access to $5 billion in bank credit, far less than it carried before bankruptcy.

The $25 billion DOE loan program was created by Congress in 2007 to mainly help struggling U.S. automakers retool older factories and improve designs. New standards require average fleet fuel economy of 35 miles per gallon within five years.

Chrysler, under the management control of Italy's Fiat (FIA.MI), has also applied for, and is expected to receive, a loan.

Alan Tonelson, research fellow at the U.S. Business and Industrial Council Educational Foundation, is mindful of potential criticism over any new federal help for GM. But he says GM should focus on resources -- even federal loans -- needed to make more efficient vehicles, just like rivals have done, if it makes business sense.

"I see no problem with this in principle. Nor do I see any compelling need for GM to remain debt free over the long term," Tonelson said. "Certainly Ford is not debt free."

Detroit-based GM plans to use the DOE loans to retool plants, mainly in economically hard-hit states. This would soften any new political criticism with Washington eager to promote jobs.

(Reporting by John Crawley; Editing by Tim Dobbyn)