LEGISLATIVE BULLETIN | December 11, 2008

The Auto Industry Financing and Restructuring Act

Summary and Background

 

During the week of December 8, 2008, the Senate and House Majority Leadership, led by the Chairmen of the Senate Banking Committee and House Financial Services Committee and after negotiation with the White House, introduced the Auto Industry Financing and Restructuring Act. The legislation was drafted in response to a request for emergency financial assistance by the "Big Three" automakers -- Ford, Chrysler, and General Motors -- in an effort to avoid bankruptcy and massive layoffs in their companies and in the companies that depend upon them for business.

 

Each automaker was required to submit a preliminary restructuring plan to Congress by December 2 to be eligible for any possible assistance. The Chairmen of the Senate Banking Committee and House Financial Services Committee then began drafting a response to the auto-loan request, taking into account the viability of each company, the appropriateness of the financial assistance, and the economic impact of a failure of even one of the "Big Three," especially during the midst of a serious recession.

 

Democrats share the American people's frustration with the failed management of the domestic automakers, but we also share their belief that major steps must be taken to prevent the Untied States from falling into an even deeper recession. With the unemployment rate already the highest in fifteen years, monthly job losses the worst in a generation, and the home foreclosure rate at the highest on record, American families simply cannot afford the catastrophic consequences of a failed U.S. auto industry.

 

The Auto Industry Financing and Restructuring Act would:

 

• Provide immediate assistance to the domestic auto industryfrom monies already allocated in Section 136 of the Energy Independence and Security Act;

 

• Protect taxpayer dollarsby ensuring that the loans will be paid back and taxpayers will share in future profits, placing strict limits on executive compensation, restricting dividends, and requiring the sale of private planes;

 

• Require a long-term restructuring plan, building upon the plans already submitted to Congress to increase the likelihood that these companies will be profitable; and

 

• Ensure strong oversightby establishing a Presidential designee to distribute, oversee, and, if necessary, recall the auto loans.

 

The House passed a version of this legislation (H.R. 7321) on December 11 on a vote of 237 to 170. The Senate is expected to consider H.R. 7321 and the nearly identical Senate bill later in the week.

 

Major Provisions

Senate Bill

 

Findings.Section 2 of the Auto Industry Financing and Restructuring Act includes the following findings:

 

• A combination of factors, including errors in the business model of the domestic automobile manufacturers, has led to the possibility of the failure of the domestic automobile industry; and

 

• Due to the systematic adverse effect on the economy, aid to the domestic automobile industry is necessary.

 

The purpose of the legislation is to restore liquidity and stability to the domestic automobile industry while ensuring that in the future the industry preserves and promotes jobs, safeguards the retirement and health care benefits of its one million retirees and their dependents, stimulates sales, results in a viable and competitive industry, and enhances the ability and the capacity of the domestic automobile industry to produce energy efficiency advanced technology vehicles.

 

Presidential Designation.Section 3 of the Auto Industry Financing and Restructuring Act would give the President the authority to designate one or more officers from the Executive Branch to carry out the purposes of this legislation. The legislation would also give the President the ability to employ additional individuals as he deems necessary to carry out the purposes of the bill. Other federal agencies may provide, at the request of the President's designee, staff on detail to carry out the purposes of this legislation.

 

Bridge Financing.Section 4 of the Auto Industry Financing and Restructuring Act would give the President's designee the authority to disburse bridge loans or and enter into commitments for lines of credit (short-term financing) to each automobile manufacturer that submitted a plan to Congress on December 2, 2008. The legislation would require that all funds available in Section 10 for these purposes must be used, taking into account the reservation of funds under Section 10(a)(2). Moreover, no new funds shall be available to any eligible automobile manufacture for bridge financing after the date on which the President's designee has approved its restructuring plan.

 

Section 4 would authorize the President's designee to distribute the bridge loans in an amount that would facilitate the continued operations of the eligible automobile manufacturers and to prevent their failure, consistent with the December 2 plans and available funds. Allocations would be made in accordance with the priorities set forth in Section 9.

 

Restructuring Progress Assessment.Section 5 of the Auto Industry Financing and Restructuring Act would require thePresident's designee to determine by January 1, 2009 appropriate measures for assessing the progress of each eligible automobile manufacturer in transforming the plan submitted on December 2, 2008 into a long-term restructuring plan. The President's designee shall evaluate the progress forty-five days after establishing the measures.

 

Submission of Plans.Section 6 of the Auto Industry Financing and Restructuring Act would give the President's designee the authority to seek an agreement on a long-term restructuring plan to achieve and sustain long-term viability, international competitiveness, and energy efficiency of an eligible automobile manufacturer between the interested parties. Interested parties may include all persons who have a direct financial interest in a particular manufacturer, including employees and retirees, trade unions, creditors, suppliers, automobile dealers, and shareholders. The legislation would also give the President's designee the authority to convene informal and formal meetings with interested parties and eligible automobile manufacturers. The Federal Advisory Committee Act would not be applicable to these meetings.

 

Section 6 of the Auto Industry Financing and Restructuring Act would mandate that no later than March 31, 2009, each eligible automobile manufacturer submit a long-term restructuring plan to the President's designee that will result in the repayment of all government-provided financing. The legislation would also require that their plan result in: 1) the ability to comply with Federal fuel efficiency and emissions requirements, 2) the ability to commence domestic manufacturing of advanced technology vehicles, plans for new and existing products, and capacity, 3) the achievement of a positive net present value, 4) efforts to rationalize costs respect to the manufacturing workforce, suppliers, dealerships of the eligible automobile manufacturer, 5) proposals to restructure existing debt, and 6) a product mix and cost structure that is competitive in the United States workplace. Finally, the legislation would give the President's designee the authority to extend the deadline by no longer than 30 days if it would facilitate in an agreement of a negotiated plan.

Financing for Restructuring.Section 7 of the Auto Industry Financing and Restructuring Act would give the President's designee the authority to provide long-term financial assistance upon approval of an eligible automobile manufacturer's long-term restructuring plan.

 

Disapproval and call of loan.Section 8 of the Auto Industry Financing and Restructuring Act would give the President's designee the authority to call the loan or cancel the commitment within 30 days if the long-term restructuring plan is not agreed to under the provisions of Section 6.

 

Allocation.Section 9 of the Auto Industry Financing and Restructuring Act would give the President's designee guidance in the allocation of financial assistance. The allocation of financial assistance by the President's designee under the Auto Industry Financing and Restructuring Act would be based on the following:

 

• The necessity of financial assistance for the continued operation of the eligible automobile manufacturer;

 

• The potential impact of the failure of the eligible automobile manufacturer on the United States economy; and

 

• The ability to utilize the financial assistance optimally to satisfy operational and long-term restructuring requirements of the eligible automobile manufacturer.

 

The order of priority of the listed conditions for funding under Section 4 would follow the order listed above, while funding allocation priority authorized under Section 7 would follow the reverse order.

 

Funding.Section 10 of the Auto Industry Financing and Restructuring Act would appropriate 14 billion for loans. The legislation would require the Energy Secretary to make available to the President's designee $7.01 billion of the funds under the provisions of Section 129 of Division A of the Consolidated Appropriations Act, 2009, relating to funding for the manufacture of advanced technology vehicles. This is subject to reserving $500 million of the amounts available under Section 136 of the Energy Independence and Security Act of 2007. The legislation would not prevent the Secretary of Energy from processing loan applications under Section 136. Further, this section would provide authorization to replenish the funds spent under this authority.

 

Terms and Conditions.Section 11of the Auto Industry Financing and Restructuring Act includes the following terms and conditions for any loan:

 

• The duration of the loan shall be seven years, or such period as the President's designee may determine;

 

• The annual rate of interest shall be five percent during the 5-year period beginning on the date on which the President's designee disburses the loan and nine percent after the end of the period;

 

• Interest payments shall be made semi-annually;

 

• No pre-payment penalty will be applied to any loan made under the Auto Industry Financing and Restructuring Act;

 

• The President's designee will have access to the eligible automobile manufacturers records;

 

• A requirement by an eligible automobile manufacturer to inform the President's designee of any asset sale, investment, contract, commitment, or other transaction proposed to be entered into by such eligible automobile manufacturer that has a value in excess of $100 million and any other material change in the financial condition of such eligible automobile manufacturer;

 

• Authority of the President's designee to review any asset sale, investment, contract, commitment, or other transaction and prohibit the eligible automobile manufacturer which received the loan from consummating any such proposed sale, investment, contract, commitment, or other transaction, if the transaction is determined to be inconsistent with long-term viability;

 

• If an eligible automobile manufacturer fails to submit an acceptable restructuring plan, comply with any conditions or requirements under the Auto Industry Financing and Restructuring Act or applicable federal fuel efficiency and emissions requirements, or make adequate progress towards meeting the restructuring progress assessment measures, as assessed by the President's designee, then, after March 31, 2009, the repayment of any loan may be accelerated to such earlier date or dates as the President's designee may determine and any other financial assistance may be cancelled by the President's designee.

Taxpayer Protection.Section 12 of the Auto Industry Financing and Restructuring Act would give the President's designee the authority to deny funding to any eligible automobile manufacturer unless he or she receives:

 

• A warrant giving the right to the President's designee to receive non-voting common stock or preferred stock in an eligible automobile manufacturer, or voting stock (at which point the designee would agree not to exercise voting power); or, in the alternative,

 

• A warrant for common or preferred stock, or an instrument that is the economic equivalent of such a warrant in the eligible automobile manufacturer, or any holding company or company that controls a majority stake in the eligible automobile manufacturer.

The warrants or instruments must have a value equal to 20 percent of the amount of all financing provided to the eligible automobile manufacturer. Such warrants or instruments must entitle the government to purchase:

 

• Nonvoting common stock up to a maximum amount of 20 percent of the issued and outstanding common stock of the eligible automobile manufacturer or a holding company, or a company that controls a majority of stock thereof (the warrant common), in the case of securities not traded on a national securities exchange; and

 

• Preferred stock having an aggregate liquidation preference equal to 20 percent of the amount of all financing provided to the eligible automaker minus the value of common stock available under the warrant common (warrant preferred).

 

The exercise price on a warrant or instrument would be a 15-day average of the market price of the common stock of the eligible automobile manufacturer which received financing, or the economic equivalent of the above market price in the case of securities not traded on a national securities exchange.

 

Except as otherwise provided in this Section, the requirements for the purchase of warrants under Section 113(d)(2) of the Emergency Economic Stabilization Act of 2008 would apply.

 

Moreover, the legislation would require that at least while assistance remains outstanding, eligible automobile manufacturersmustobserve standards that apply to the five most highly paid senior executive officers that:

 

• Prohibit compensation incentives to take unnecessary and excessive risks that threaten the value of the company;

 

• Require recovery by the company of any bonus or incentive compensation based on statements of earnings, gains or other criteria that are later found to be materially inaccurate;

 

• Prohibit golden parachutes;

 

• Prohibit paying or accruing bonuses to the 25 most highly paid employees; and

 

• Prohibit compensation plans that would encourage manipulation of reported earnings.

 

This section would also require eligible automobile manufacturersto divestany ownership or leasing of any private passenger aircraft, or any interest in any such aircraft, except that such eligible automobile manufacturer shall not be treated as being in violation of this provision with respect to any aircraft or interest in any aircraft that was owned or held by the manufacturer immediately before receiving such assistance, as long as the recipient demonstrates to the satisfaction of the President's designee that all reasonable steps are being taken to sell or divest such aircraft or interest.

 

Moreover, the legislation would prohibit an eligible automobile manufacturer, or its holding company that owns a majority of its stock, from paying dividends, distributions or the economic equivalents, with certain exceptions.

 

Under this legislation, all obligations of an eligible automobile manufacturer must be subordinate to a loan from the President's designee to the extent permitted by the terms of other obligations. If the company enters bankruptcy, that bankruptcy will not discharge the company from the requirement to repay the debt to the government or the government's claims against any property.

 

Oversight and Audits.Section 13 of the Auto Industry Financing and Restructuring Act would give the Comptroller General of the United States oversight of the activities and performance of the President's designee. The Comptroller General would have access, upon request, to any information, data, schedules, books, accounts, financial records, reports, files, electronic communications, or other papers, things, or property belonging to or in use by the President's designee. This section would also mandate that the Comptroller General of the United States report to Congress on his findings, as warranted, but no less than every 60 days.

 

The Special Inspector General would be given the responsibility of conducting supervising, and coordinating audits and investigations of the President's designee in addition to the duties of the Special Inspector General.

 

Automobile Manufacturers' Study on Potential Manufacturing of Transit Vehicles.Section 14 of the Auto Industry Financing and Restructuring Act would require each eligible automobile manufacturer that receives financial assistance to conduct an analysis of potential uses of any excess production capacity (especially those of former sport utility vehicle producers) to make vehicles for sale to public transit agencies.

 

Reporting and Monitoring.Section 15 of the Auto Industry Financing and Restructuring Act contains a set of reporting and monitoring requirements that would require:

 

• A report to the Congress by the President's designee on each bridge loan made under Section 4 no later than five days after the date of the consummation of such loan and no later then 10 days if funding is allocated under Section 5(a) after establishing the restructuring progress assessment measures;

 

• A report to Congress by the President's designee on the exercise of a right under Section 11(f) to accelerate indebtedness of an eligible automobile manufacturer or to cancel any other financial assistance provided to such eligible automobile manufacturer, and the facts and circumstances on which such exercise was based, before the end of the 10-day period beginning on the date of the exercise of the right; and

 

• The monitoring by the President's designee on the use of loan funds received by eligible automobile manufacturers and the reporting once every 90 days to the Congress (beginning 30 days after the date of enactment of this Act) on the progress of the ability of the recipient of the loan to continue operations and proceed with restructuring processes that restore the financial soundness of the recipient and promote environmental sustainability.

 

Report to Congress on lack of progress toward achieving an acceptable negotiated plan.Section 16 of the Auto Industry Financing and Restructuring Act would require the President's designee to submit to Congress a report outlining any additional powers and authorities necessary to facilitate the completion of a negotiated plan under Section 6. Moreover, if, by March 31, 2009, the designee finds (based on the assessment measures established under Section 5) that adequate progress is not being made towards achieving a negotiated plan by the eligible automobile manufacturer, the designee would be required to submit to Congress a report detailing the impediments to achieving the plan by the manufacturer.

 

Submission of plan to Congress by the President's designee.If a report outlined in Section 16 is submitted ,Section 17 of the Auto Industry Financing and Restructuring Act would require the President's designee to further submit to Congress recommendations for a plan to achieve long-term financial viability, international competitiveness and energy efficiency, including through a negotiated plan, a plan to be implemented by legislation or a reorganization pursuant to Chapter 11.

 

Guarantee of Leases of Qualified Transportation Property.Section 18 of the Auto Industry Financing and Restructuring Act would make the President's designee, upon the request of a lessee of qualified transportation property, a guarantor with respect to all obligations of such lessee with respect to leases of such qualified transportation property. Any claims in excess of collateral held for benefit of the President's designee would be paid from not otherwise appropriated funds in General Fund of the Treasury, and the designee would recoup these funds by establishing a sufficient fee, within three years of claim's payment, from any lessee or guarantor for whom the claim was paid or guarantee issued.

 

This section defines the term "qualified transportation property'' as domestic property subject to a lease that was approved by the Federal Transit Administration prior to January 1, 2006 and the term "guarantor" as including, without limitation, any guarantor, surety, and payment undertaker.

 

CoordinationWith Other Laws.Section 19 of the Auto Industry Financing and Restructuring Act would ensure that passage of this bill would not alter, affect, or supersede any of the following:

 

• Section 129 of division A of the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009, relating to funding for the manufacture of advanced technology vehicles; or
   
• Any existing authority to provide financial assistance or liquidity for purposes of the day-to-day operations in the ordinary course of business or research and development.

 

Except to provide bridge financing or to implement a plan for restructuring pursuant to this Act, no funds from the U.S. Treasury may be used for the purpose of assisting and eligible automobile manufacturer to achieve viability or otherwise to avoid bankruptcy. 

Section 19 would temporarily suspend a prohibition on the annual cost of living salary adjustments for justices and judges of United States during Fiscal Year 2009. 

Moreover, Section 19 would prohibit antitrust laws from applying to meetings, discussions, or consultations among an eligible automobile manufacturer and its interested parties for the purpose of achieving a negotiated plan, other than for price-fixing, monopolizing a market and other specified improper purposes. This prohibition would expire after three years. 

Treatment of restructure for purposes of applying limitations on net operating loss carryforwards and certain built-in losses.Section 20 of the Auto Industry Financing and Restructuring Act would provide that Section 382 of the Internal Revenue Code not apply in the case of an ownership change resulting from this Act. 

Emergency Designation.Section 21 of the Auto Industry Financing and Restructuring Act would designate any funds provided by this legislation as an emergency requirement and necessary to meet emergency needs pursuant to Section 204(a) of S. Con. Res. 21 (110th Congress), the concurrent resolution on the budget for Fiscal Year 2008.

 

Legislative History

In early November, the CEOs of Ford, Chrysler, and General Motors requested emergency financial assistance from Congress in an effort to avoid bankruptcy and massive layoffs in their companies and the companies that depend upon them. Hearings were then held in the both the Senate Banking Committee and the House Financial Services Committee. Each of the "Big Three" was required to submit a preliminary restructuring plan to Congress by December 2 to be eligible for any possible assistance. The companies submitted their individual plans by the deadline, and hearings were held. During the week of December 2, the Chairmen of the Senate Banking Committee and House Financial Services Committee began drafting a response to the auto-loan request, taking into account the viability of each company, the appropriateness of the financial assistance, and the economic impact of a failure of even one of the "Big Three," especially during these midst of a serious recession. 

During the week of December 8, the Senate and House Majority Leadership, after negotiations with the White House, introduced the Auto Industry Financing and Restructuring Act. The House passed a version of this legislation (H.R. 7321) on December 11 on a vote of 237 to 170. The Senate is expected to consider H.R. 7321 and the nearly identical Senate bill later in the week. It is anticipated that the Senate will use H.R. 7005 as the vehicle for the Senate bill.

 

Expected Amendments

At the time of this writing, no details on amendments have been made available, but amendments are expected. Updates will be sent to the DPC e-mail lists.

 

Administration Position

At the time of this writing, no Statements of Administration Policy (SAP) have been issued on the Auto Industry Financing and Restructuring Act. The White House is reported to be in support of the Senate bill.

DPC 

DPC