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loan guarantee

Page history last edited by PBworks 11 years, 12 months ago

Federal Loan Guarantees





When the got into trouble, Lockheed sought funding from the government.  A bail out package was pleaded for, and initially awarded.  Actually, what happened was that the firm fell into trouble, and then sought a loan guarantee from the US Congress.


If the firm were to default on the loan, the government would be called on to make up the difference.   The government guarantee converts a risky bond into a risk-free bond.  This allows the firm to borrow large amounts of money at a low cost.


The two biggest loan guarantees that the US government has ever made were to Lockheed in 1971, and to Chrysler in 1980.  Neither firm defaulted on ther loans.


In order for shareholders to get additional value, they need the company to issue new debt at the low rate.  This means that they need the old debt to be re-negotiated or retired before issuing new (cheaper) debt.  This is what happened with Chrysler.



Nuclear energy


why does NRG want to build a nuclear plant in Texas? Two factors are in play. First, the license costs a relatively small amount compared with the cost of construction. Second, the federal government would guarantee up to 100% of the $6.5 billion to $8.5 billion NRG might borrow from capital markets (as long as it doesn't exceed 80% of the project cost). Without such guarantee no investor would lend significant amounts of capital to NRG.


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