Will GM and Ford Get What They Want?

General Motors Corp. (GM) has made it clear that it needs $4-billion in funds immediately in order to prevent a liquidity crisis before the end of the year. Earlier this week, it asked for a $12-billion Federal term loan facility and a $6-billion credit line, while detailing the proposed structure of this assistance as part of a larger restructuring plan submitted to Congress.

J.P. Morgan analyst Himanshu Patel said the requested funds, which have a cumulative total of between $10-billion and $15-billion through the first quarter of 2009, could be just enough for GM to realize sizable cost-savings. However, he said that significant risks remain given the hazardous operating environment and the chance of a longer-than-expected recession.

The restructuring proposal included the creation of an administration-led oversight board.

Mr. Patel told clients:

While the board will likely lack legal authority to re-write GM obligations (e.g., creditors, unions) its control of government purse strings could make it a much needed arbitrator in gaining necessary concessions from various parties.

Nonetheless, GM’s debt-restructuring proposal is considered a positive step and the analyst estimates that it could entail re-cutting the 2007 labour accord that settled United Auto Workers other post-employment benefits liabilities at a new rate similar to that of Ford Motor Co. (F). He said creditors would then be expected to take a haircut of as much as 60% to existing face value.

Mr. Patel expressed his disappointment that there was no specific mention of labour cost savings beyond renegotiation of VEBA – a specialized tax-free health care trust fund that will pay for the future benefit costs of a company’s current or retired workers.

He estimates that the company’s expected sale of Saab, substantial reduction for Pontiac that would made it a niche brand, and either the sale of Saturn or a conversion of its dealers to core brands could save nearly $1-billion in capital expenditures.

But will GM get what it asked for? Mr. Patel said the “comprehensive and newly specific” plan will likely get a much better reception on Capital Hill. As for the stock, he maintained a “neutral” rating given the uncertainty related to equity dilution risk and the length of the current economic downturn.

Meanwhile, Ford’s plan submitted to Congress requested a $9-billion “standby” credit line. It does not need immediate help given its existing revolving loan and this would serve as a backstop if industry conditions worsen.

Mr. Patel said Ford’s plan did not appear to seek major concessions from union nor its creditors. The company expects ample liquidity through 2009. So while the plan that includes being break-even to profitable in its auto operations in 2011 may appear achievable on the surface, the analyst would have liked to see a little more in terms of cash conservation measures.

Comments

[Marvin H:]

The big three have been in bed with the big oil companies for decades. Why doesn't the oil companies bail them out? Hey Exxon help your buddies out, they have helped you make billions by making gas guzzlers and refusing to build fuel saving vehicles haven't they?.

2008 Dec 04 04:12 PM

[Thadeus Tho...:]

Marvin H wrote:

> The big three have been in bed with the big oil companies for decades.
> Why doesn't the oil companies bail them out? Hey Exxon help your
> buddies out, they have helped you make billions by making gas guzzlers
> and refusing to build fuel saving vehicles haven't they?.

Refusing? All of the 'Big 3" have more vehicles getting 30+ mpg then Toyota, Honda, or Nissan combined. Unfortunately they also have more big trucky things that the American public wanted to salve their collective egos. Sportsmen loved these things ever since an aftermarket manufacturer sold fiberglass add on tops for Chevy trucks and then sold the ides to GM and created the Chevy Blazer. Gas had been cheap for years here, so it seemed like "Why not"? Would you rather have the government control and tell GM what kinds of vehicles they shoudl make? We're going to have that now... temporarily they say.
I haven't figured all of this out but it smacks more of a big diversion or smokes screen to get peoples attention away form the FREE money all the highly paid financial gurus just got for causing all this by running their companies into the ground and drying up the credit supply. don't people realize that the auto industry survives on constantly revolving credit for raw materials and dealer inventory? This is a L O A N folks. Like Chrsler got many years ago and paid back. Why aren't pole screaming their heads off about the Fannie Mae, Freddie Mac, AIG, City Bank , and Lehman Bros. who just got $700-$800 billion for free with no questions asked? This is the outrage. That all these financial gurus got us into this while making HUGE salaries that dwarf the BIG 3 CEOs. And what about all the government paid financial people that didn't see this coming? Not enough regulation in the investment banking industry with flakey , irresponsible financial "products" with very , very high risks and unscrupulous business practices. Why aren't people outraged about that?? They dried up the credit supply so business seized up folks. Open your eyes.

2008 Dec 04 05:16 PM

[rber:]

God help us if they do!

2008 Dec 04 08:12 PM

[Urbane Gori...:]

Unpleasant as it seems, we need to bail them out. For every terminated UAW worker, 10 others lose their livelihood. It's been said that 1/6 of the population works in a field associated with the auto industry. In 2206, the direct number of those emplyed by the auto industry was 1,250,000. Take the 10X figure, or 12,500,000 and add that to the unemployment reported figure and ask yourself what the USA will be like with say a 12% or 15% unemployment figure.

We have to face the fact that we either help the workers in the auto industry, or we pay their unemployment, food stamps and retraining, increased home repos, retirees with no means of support, medical care etc... etc...

If Armageddon is your thing, then argue in favor of letting the auto business collapse. Personally, I'll take the cheaper route.. Let's bail out the auto business and help the workers of America.

For the record, we all know this bialout won't solve the problem with our antiquated auto industry, but the alternatives to all of us that do not work for teh Big Three are indescribable and horrifying.

jegan.

2008 Dec 05 10:52 PM