Dec. 20 (Bloomberg) -- General Motors Corp. and Chrysler LLC, steadied by a $13.4 billion federal lifeline, face a March 31 deadline to slash debt, rework labor contracts and plan for thousands of job cuts or face government-ordered bankruptcy.

The loans announced yesterday by President George W. Bush will provide the government with warrants allowing it to profit from a successful rescue, and seniority over much of the automakers’ debt should the effort fail.

Bush’s move, which gives the U.S. wide latitude over the auto industry for the first time since the 1980s Chrysler Corp. bailout, is aimed at keeping GM and Chrysler alive long enough for a reorganization plan from the incoming Congress and President-elect Barack Obama.

“I don’t regard it as being the rescue of the auto companies,” said Gerald Meyers, a professor at the University of Michigan in Ann Arbor and a former CEO of American Motors Corp. “It’s a temporary move to get it out of my backyard and let you deal with it.”

Bush tapped the U.S. bank-bailout fund to pay for the loans. GM is in line for $4 billion more in borrowing in February, provided Congress expands the Troubled Asset Relief Program.

With both companies saying they were only weeks away from insolvency without an infusion of cash, the White House stepped in after a compromise plan backed by Bush and House Democrats stalled in the Senate, raising the prospect of a collapse that would have weakened a U.S. economy already in recession.

Obama endorsed the plan, calling it a “necessary step” to “save this critical industry.”

March 31 Deadline

GM, the biggest U.S. automaker, and No. 3 Chrysler must comply with the government terms or have the Treasury Department call the loans. Such a step would likely force the companies into bankruptcy.

“Our focus now turns to rapidly and fully implementing our restructuring plan,” GM Chief Executive Officer Rick Wagoner said at a news conference in Detroit, the automaker’s hometown.

Ford Motor Co., the second-largest U.S. automaker, has said it doesn’t need emergency aid.

GM and Auburn Hills, Michigan-based Chrysler must provide warrants for non-voting stock, limit executive pay, open up financial records, not issue dividends until the debt is repaid and give the government veto power over transactions larger than $100 million. They also have to agree not to use corporate jets.

Debt Terms, Czar

Government debt will become senior to other borrowing, to the extent allowed by law, and the automakers must cut their debt by two-thirds in an equity exchange.

Joel Kaplan, Bush’s deputy chief of staff, said the Treasury secretary would in effect be the so-called car czar, enforcing deadlines and holding authority to revoke the loans.

Bush also linked the assistance to changes in automakers’ union agreements, stipulating that half of the companies’ payments to a United Auto Workers retirement fund be made in equity.

A program that pays UAW members when they don’t work must be eliminated, and union labor costs and rules must be recrafted to be competitive with those of foreign automakers by Dec. 31.

The requirements could be modified by negotiations with the union and debtholders. The automaker cutbacks will involve shutting plants and chopping payrolls; the survival proposal GM submitted to Congress on Dec. 2 envisions cutting U.S. employment by 34 percent.

Sununu’s View

Republican Senator John Sununu of New Hampshire, the newest member of the board overseeing TARP, said Bush should have imposed more restrictions on the companies, including meeting clearer financial goals.

“There aren’t a lot of requirements placed on the auto manufacturers” in exchange for the loans, Sununu said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” that was aired yesterday.

GM rose 83 cents, or 23 percent, to $4.49 yesterday in New York Stock Exchange composite trading, while Ford slid 11 cents, or 3.9 percent, to $2.95. The companies’ shares have tumbled 82 percent and 56 percent this year, respectively.

GM will get $4 billion by Dec. 29, $5.4 billion by Jan. 16 and the final $4 billion by Feb. 17, provided Congress releases the second $350 billion of the $700 billion allocated for TARP. Chrysler would get $4 billion by Dec. 29.

Plunging Sales

U.S. auto sales that slumped last month to the lowest annual rate in 26 years pushed GM and Chrysler to the brink of failure.

Reeling from almost $73 billion in losses since 2004, GM reported $16.2 billion in cash as of Sept. 30, and needs $11 billion to pay monthly bills. Its 2008 U.S. sales declined 22 percent through November.

Cerberus Capital Management LP’s Chrysler has been battered by a 28 percent plunge in U.S. sales, the most among major automakers. It finished the third quarter with $6.1 billion in cash and needs at least $3 billion to operate, Chief Executive Officer Robert Nardelli told Congress on Nov. 18.

For GM, the two biggest challenges will be working out the debt-for-equity swap with debtholders and completing agreements with unions, Wagoner said at the briefing. GM halted its dividend in July.

UAW leaders agreed Dec. 3 to suspend the program that pays laid-off employees after their jobs end, and to postpone automakers’ contributions to the new union-run trusts that will take on responsibility for retirees’ medical care.

Some of the union conditions match those developed last week by Republican Tennessee Senator Bob Corker in a failed attempt to win support of Senate Republicans for a $34 billion congressional bailout.

UAW ‘Disappointed’

“While we appreciate that President Bush has taken the emergency action needed to help America’s auto companies weather the current financial crisis, we are disappointed that he has added unfair conditions singling out workers,” UAW President Ron Gettelfinger said in a statement.

GM will need to persuade debtholders such as Franklin Resources Inc. and Pimco Advisors LP to accept two-thirds less than the face value of their bonds as part of a plan to cut about $62 billion in debt, including future obligations to the health- care fund.

Excluding the retiree-fund obligations, GM’s debt was $43.3 billion at the end of September.

‘Complex and Unprecedented’

“Negotiations will be very complex and unprecedented,” Kip Penniman, an analyst at KDP Investment Advisors Inc. in Montpelier, Vermont, wrote in a report. “Bondholders with short- maturity notes will likely argue that their recoveries should be greater than long-dated notes. Secured creditors will be wary of taking any haircut.”

Chrysler debtholders, suppliers and dealers all will need to show “continued support” to help create a viable business plan by March, Nardelli told employees in an e-mail.

Cerberus, the New York-based buyout firm that bought 80.1 percent of Chrysler from Daimler AG for $7.4 billion last year, said it would hand over equity in Chrysler’s automotive operations to employees and creditors under the rescue plan.

Fitch Ratings cut both GM and Chrysler debt to C, the last grade above default, from CCC, on concern the automakers don’t have enough equity to meet the federal requirements or the debt exchange, and may still have to seek court protection.

“The threat of a bankruptcy remains,” Fitch said.

GM’s 8.375 percent bonds due in July 2033 rose 3 cents to 18.5 cents on the dollar, yielding 45.2 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. Ford’s 7.45 percent bonds due in July 2031 gained 0.5 cent to 25.5 cents on the dollar, yielding 29.4 percent, Trace data showed.

To contact the reporter on this story: Jeff Green in Washington at jgreen16@bloomberg.net; Alex Ortolani in Southfield, Michigan, at aortolani1@bloomberg.net