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How Opel could finance restructuring

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How Opel could finance restructuring

June 11, 2010 14:46 CET

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FRANKFURT (Reuters) -- Germany has rejected General Motors Co.'s request for state aid for its Opel/Vauxhall unit, placing the burden of support on four German states which host Opel plants.

Opel's liquidity is secured through the rest of this year, but it needs to finance a reorganization plan costing billions of euros that will cut jobs and capacity by a fifth and invest in new products with the aim of bringing the money-losing unit back into profit.

Here are ways the financing issue for GM's European arm could play out:

Opel finds other access to loan guarantees

Opel had applied for 1.1 billion euros in federal guarantees from government bailout money, dubbed the Deutschlandfonds, to backstop private-sector loans offered by Deutsche Bankand Barclays.

While this rescue fund no longer serves as an option, Opel will certainly seek guarantees from German states Hesse, North Rhine-Westphalia, Thueringia and Rhineland-Palatinate.

All four have signalled willingness to help. Hesse, for example, has a 1.5 billion euro guarantee program for 2010 that Opel could tap. It lent 347 million euros to Opel last year as part of an emergency bridge loan, since repaid with interest.

Opel CEO Nick Reilly believes the four would be willing to extend loan guarantees for 275-550 million euros of the borrowing risks. These could be used to access funds from the European Investment Bank (EIB).

German Chancellor Angela Merkel has suggested Opel could take advantage of other German federal programs designed to support energy efficient technology, although she was not specific.

Opel receives European loans

The European Investment Bank, the EU's banking arm, is in early-stage talks with Opel over access to possible loans related to promoting green technology.

The bank has two widely used programs that could provide as much as half the funding costs for a specific project. Each programhas capped funding at 400 million euros and requires governments to guarantee around 80 percent of the funds at risk.

One program focuses on research and development for environmentally friendly technology, while the other supports investments in brick-and-mortar facilities in structurally weak regions that would then build more fuel-efficient vehicles.

Opel's car plants in Eisenach, Germany, as well as Gliwice in Poland would qualify for the latter program, as would its Szentgotthard powertrain plant in Hungary.

At least 9 of the 27 voting members representing at least half of the EIB shareholder capital need to approve loans.

That means Germany, Britain, Spain, Poland and Austria -- the countries home to Opel's major manufacturing operations -- would need to rally support from at least another four members that control roughly 4 percent of the capital.

GM increases support for Opel

Reilly has said GM could "in theory" finance Opel entirely, but this was not its preferred option since it already boosted its funding commitment to 1.9 billion euros in March following pressure from Germany.

Excluding funds in escrow, GM had gross cash of $23.3 billion at the end of March versus $14.2 billion in debt. Its first-quarter funds from operations exceeded capital expenditure by about $1 billion.

Nevertheless, GM would have collapsed were it not for a structured insolvency sweetened with around $50 billion in U.S. tax money. Until the U.S. government can sell its majority holding, "Government Motors" remains a state-owned carmaker that needs to be mindful of political winds when tapping funds.

A mixture of funding

With Britain and Spain approving around 600 million euros in aid, GM believes it needs at least another 800 million to reach its minimum funding requirement through 2014.

Additional funding is expected from Austria and Poland.

One company source close to the talks said the most likely option to close this gap would involve a mixture of EIB loans and higher pledges from GM.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100611/ANE/306119968/1308#ixzz0qYNinrCM

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