Detroit's Next Headache: Dangerous Debt

When Detroit's Big Three CEOs return to Washington on Dec. 2 with a plan tailored to sell Congress on a $25 billion bridge loan, they will try to convince lawmakers that they are in the throes of big restructuring moves that will bring profits back as soon as the economy picks up.

Sources at the companies and in Congress say that General Motors (GM), Ford Motor (F), and Chrysler are mulling symbolic moves like executive pay cuts and scaling back use of corporate planes.

But given the huge debt load they may be taking on, they might have to show more substantial ways to save money. Congress will be allocating billions in taxpayer dollars to invest in the Big Three carmakers, so the lawmakers should know what the prospects are for these companies to compete should the bridge loan see them through the downturn.

Close to the Brink

It's not pretty. All three companies are already carrying massive debt and interest payments that will sap their ability to develop and market new models once the economy turns around. GM has $43 billion in debt and Ford has $24.9 billion in borrowings. "Their debt burden has been escalating for some time," says Mark Oline, managing director for debt-rating agency Fitch & Co. "These companies will be smaller so their earnings capacity will be smaller. The interest will be a big burden."

Let's look first at GM, which is closer to the brink of collapse than Ford. GM already pays more than $3 billion a year in interest. JPMorgan (JPM) analyst Himanshu Patel estimates that GM needs $17 billion in government loans to make it through 2009. That would add another $900 million in interest. That means GM would have close to $60 billion in debt and more than $4 billion a year in interest payments.

Plus, GM has to pay back $2.3 billion next year, $200 million in 2010, and $1.7 billion in 2011, according to company financial statements. All of that will require cash that could go into new cars, marketing, or disposing of brands.

Health-Care Trust Could Help

Ford pays $2.4 billion a year in interest. While the company is in a better cash position, since it borrowed $23 billion while credit markets were liquid, its interest costs also would rise.

The carmakers racked up huge debt over the past few years largely to fund pension plans, buy out workers, close plants, and set up a union-led health-care trust that will hand management of medical benefits to the UAW.

GM President and COO Frederick A. Henderson said in a Nov. 18 interview that the debt is only a big burden if GM can't improve profits. A union health-care trust, called a voluntary employee benefits association, or VEBA, would save $4.8 billion a year in cash outlays. That deal and other union concessions will make the company more profitable once the market turns around (BusinessWeek.com, 9/26/08).