Mixed views on auto bailout

The U.S. Congress denied Detroit automakers a bailout last week, but left the door open if they could demonstrate a plan for long-term viability.

“Until we can see a plan where the auto industry is held accountable and a plan for viability on how they go into the future… we cannot show them the money,” House Speaker Nancy Pelosi, D-Calif., said last week.

In the balance is a $25 billion, 10-year loan to General Motors, Ford and Chrysler. The interest would be 5% per year for the first five years and then 9% for the last five years. The money would come from the $700 billion bailout package congress has already passed.

Private equity investors are carefully watching the decision, not least of which because Chrysler is more than 80% owned by buyout shop Cerberus Capital. The firm has said it would give up any profit from the deal should a bailout go through.

Perhaps of greater interest to buyout firms is the effect letting the automakers fail would have on the lending. “The automotive complex represents 10% of the debt capital market,” says Jim Upchurch of Caltius Mezzanine. “A shutdown there could really decrease lending in 2009.”

The other major concern has been the potential for the effects a failure could have on all the companies that sell parts to U.S. automakers. The government underestimated the domino effect of the Lehman Brothers bankruptcy “and may be underestimating the multiplier of the auto industry on parts suppliers and others,” says Jim Hunt the CEO of THL Credit Group.

Venture capitalists are interested in what a bailout could mean for startups, especially after investing $404.5 million into cleantech automotive startups, according to data from Thomson Reuters (publisher of PE Week). It is unclear what provisions might be included in a bailout package to promote research and development of fuel efficient vehicles.

Mitt Romney, a former venture capitalist and Massachusetts governor, wrote an opinion piece in The New York Times last week advocating government funds go to primary research in energy instead of a bailout for Detroit. He favors a drastic restructuring of the automotive industry instead of allowing it to purse its current “suicidal course.”

The automotive startups have been particularly quiet on the proposed automotive bailout. “Whether you think the automotive industry hasn’t been particularly innovative, or its union contracts are too rich, or its management is ineffective, we are where we are, and whether we should do something about it isn’t something we’ll comment on,” says Tesla MotorsDiarmuid O’Connell, the company’s vice president of corporate development.

Tesla isn’t the only car startup that’s mum on the bailout. “Aptera does not have a position on the proposed loan legislation for Detroit automakers,” says Teresa Bridwell, a spokesperson for Idealab, the car maker’s venture backer. “But Aptera strongly endorses government support of high efficiency vehicles that can reduce our dependence on foreign oil.”

Congress is counting on General Motors, Ford and Chrysler to come back with clearly defined restructuring plans before it will support a loan. The deadline for such a plan is Dec. 2 and Congress will consider the proposal during the week of Dec. 8.

Additional reporting by Constance Loizos and Reuters.