That GM’s announcement that it’s repaying its $6.7 billion loan from the federal government early is being hailed by anybody as a great achievement is pretty puzzling to me. GM lost $4.3 billion in the last half of 2009. Does anybody believe that the company will repay its loan out of an operating profit? It’s far more credible that the loan will be repaid by borrowing the money from somebody else. It just means that somebody believes that the loan is solid because the federal government will bail GM out come what may.
Will the new loan be at a higher or lower rate than the current loan? If, as I suspect, the new loan will be at the same or a higher rate than the old it doesn’t affect GM’s liabilities but it will increase its operating costs.
At this point the U. S. and Canadian governments own about 70% of GM’s outstanding stock. Indeed, the putative value of the federal government’s stock in GM is/was an order of magnitude greater than the loan the company has announced it’s repaying. Or, said another way, from our standpoint the value of the stock is more important than quick repaying of the loan. The question I have to ask about the move is does it maximize shareholder value? I can’t see how. In fact I see little reason other than political ones or, possibly, something related to executive compensation for the move at all.
Update
It’s even weirder than I thought. According to Forbes the jack being used to pay off the loan came from a working capital fund supplied by the federal government. Which results in this turn of events:
Sean McAlinden, chief economist at the Ann Arbor-based Center for Automotive Research, points out that the company has applied to the Department of Energy for $10 billion in low (5%) interest loan to retool its plants to meet the government’s tougher new CAFÉ (Corporate Average Fuel Economy) standards. However, giving GM more taxpayer money on top of the existing bailout would have been a political disaster for the Obama administration and a PR debacle for the company. Paying back the small bailout loan makes the new–and bigger–DOE loan much more feasible.
In short, GM is using government money to pay back government money to get more government money. And at a 2% lower interest rate at that. This is a nifty scheme to refinance GM’s government debt–not pay it back!
Or, said another way, the move does maximize shareholder value by reducing its operating costs by paying the shareholder less in interest on the loans the company has taken out from the shareholder. Heads I win; tails you lose.
Shall we start a pool on when GM will become a publicly traded company again?
Government Motors indeed.