Summit News

Automakers could use $50 billion in loans: UAW

DETROIT (Reuters) - The U.S. auto industry needs $50 billion in low-interest, government-guaranteed loans and could return to the U.S. Congress for a second round of $25 billion after approval of the first $25 billion, the head of the United Auto Workers union said on Tuesday.

United Auto Workers Union President Ron Gettlefinger attends the Reuters Autos Summit in Detroit, Michigan September 16, 2008. REUTERS/Rebecca Cook

UAW President Ron Gettelfinger, speaking at the Reuters Autos Summit in Detroit, said it was critical for U.S. lawmakers to pass funding for the loan program quickly.

The federal loan program has run into some opposition from critics, who call it a bailout for the auto industry.

But Gettelfinger said federal loan guarantees would help the auto industry make new investment in fuel-saving technology and preserve jobs at a time when auto sales are slumping and credit markets are tight.

The industry could still secure funding for up to $50 billion in two installments, he said. Automakers had initially looked to secure that much in loans before scaling back their request in the interest of securing the $25 billion included in a 2007 energy bill.

“There’s always that possibility,” he said of a second round of loans. “When people see the success of it -- what it means for the industry, to the country, to the environment, to the consumer -- I think it will be easier the next time around.”

Lawmakers must appropriate about $7.5 billion to cover default risk in order to issue the loans. The $25 billion was pledged to the auto industry to help cover the cost of meeting fuel economy standards that will be raised to 35 miles per gallon on average starting in 2020.

With U.S. auto sales near 15-year lows and no expectation of a quick turnaround for the world's largest auto market, General Motors CorpGM.N, Ford Motor CoF.N and privately held Chrysler LLC have faced pressure to shore up cash to ride out the downturn.


But the credit crisis that forced Lehman Brothers Holdings Inc LEH.N into bankruptcy this week has probably eliminated any chance automakers will be able to raise capital from risk-averse creditors in the short-term, executives and bankers said.

GM, which has a target of raising up to $5 billion through a combination of borrowing and asset sales, expects credit to contract further in the wake of the Lehman collapse, Chief Operating Officer Fritz Henderson told Reuters on Monday.

With credit ratings in the “junk” category, U.S. automakers also would face double-digit percentage interest rates on any new borrowing.

Because of the auto industry’s cash crunch, attention has turned to the prospect for the federal loan program to bridge the gap for U.S automakers, allowing them to offset investment in small cars and more fuel efficient engines until they start to capture savings from a new contract with the UAW in 2010.

“With the tight money market that’s out there, a single digit percentage on a loan means a lot to this industry,” Gettelfinger said.

But he warned U.S. automakers not to expect a massive trust fund aligned with the union would be a “piggy bank” to make loans to them, saying the UAW would safeguard those funds earmarked for retiree health care.

In July, the UAW allowed GM to defer a planned $1.7 billion down-payment on the a health care trust that will be set up by the automakers and managed by the union. Chrysler also deferred a payment to the UAW fund, which will total $56 billion.

The union will earn 9 percent on the deferred GM payment. That move was part of a plan by the automaker to shore up its cash position and made the UAW a creditor to GM.

The health care trust fund, known as a voluntary employee beneficiary association, was the centerpiece of a cost-cutting contract negotiated last year between the UAW and automakers. The trust fund will take effect in 2010 and is expected to cut costs for the automakers by covering health care costs for over 700,000 UAW-represented workers and retirees.

Gettelfinger said the UAW’s decision to allow GM and Chrysler to defer payments on the health care trust fund would not be a precedent for future loans to the industry.

“It is absolutely not a piggy bank,” Gettelfinger said. “Our first responsibility is to retirees and I’m going to fight anybody over that. Because it’s critically important that we make sure that these retirees are taken care of.”

Reporting by Kevin Krolicki, editing by Gerald E. McCormick and Carol Bishopric