The U.S. House has passed a $25 billion loan to automakers. It is not a bailout, but a loan that will be financed at the cost of funds of the Treasury. The funds must be used for:

1-A US manufacturing facility where the loan financed is at least 30% of the cost of a plant that produces vehicles that get at least 125% of the average MPG of American cars.

2-To support a facility that is at least 20 years old in the U.S. Most European and Asian facilities in the U.S. are less than 20 years old, so this would essentially go to the Big 3.

Automakers are trying to include auto asset-backed securities (ABS) in the bailout package along with mortgage-backed ABS. Auto ABS spreads have widened by 40% since this crisis, which has made getting an auto loan difficult for anyone with a 720 credit score and below.

Sales have fallen to a 12.8 million seasonally adjusted rate due to the crisis. However, we think these loans will not be included in the package, and spreads will in fact be reduced when the mortgage ABS are taken off banks’ books and banks can reduce loan costs in areas like auto lending. Hence, the automakers may get an indirect effect from the bailout, not a direct effect.

Zacks Investment Research

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