How Will GM's Financial Health Progress?

With a 35% drop in sales reported by the big three auto companies, the financial stress on them has only increased further. This will have its impact on employment as production is reduced. According to the NYT, GM’s (GM) chief market analyst, Michael C. DiGiovanni, said that the automaker was predicting industry sales of 10.5 million to 12 million vehicles for the year.

The company recently received federal loans which provided some confidence to the market. The US automaker bailout is trickier than it may appear. The conditions that have been imposed - as an expert observed - are “structured for bankruptcy”. By end of March the company will to prove that it is viable. By this time it needs to negotiate with its creditors to have its debt modified or reduced by two thirds at the minimum. It also needs to have new agreements with its vendors with new conditions more favorable for it. The compensation and benefits of workers and executives also needs to be lowered. If it is viable and if it is able to deliver, it needs to repay the loan. Most observers doubt if this can be achieved in such a short period. This would then result in a pre-packaged bankruptcy. GM's only hope is for Obama to show it leniency.

The key questions are:

• Will a pre-packaged bankruptcy be considered to allow GM to renegotiate its outstanding loans and work out better arrangements with its dealers and the United Auto Workers?
• How much will government interfere in the running of its businesses?
• How will the government make it easier for it to do business? E.g. addressing the fifty-state fuel economy and exhaust emission regulations.
• How long will the government stand by these companies given that the whole process to stabilize may require anything between 3 to 5 years and may require upward of $100 bn. over this period?
• Will all three be supported equally or the government might want to weigh which has the best chance? It could impact many shareholders, especially pension funds and college endowments. It could also feed the unemployment numbers in a big way.
• Will a higher federal gasoline tax be imposed to make people move to more fuel efficient cars?
  

GMAC, the lending arm of GM received a $6bn rescue package, which was received bullishly by the market. As one expert summarized:

GMAC is however not so well capitalized for it to push lending in a big way. Fed while approving for it become a bank holding co. has also asked it improve its capital adequacy by raising $30bn. Of the $6bn, 1bn is going to GM to subscribe to GMAC rights issue. It has 5bn of TARP money. For the balance capital requirement (apart from the $9bn it had as of September) it concluded a debt for debt-and-preferred exchange offer, the deadline for which it had to extend several times. It says enough bondholders swapped their debt for it to meet the Fed’s capital requirement, but that doesn’t leave it with a huge amount of excess cash to leverage into new loans, or act as a buffer against future losses. The fear is that it may have to make more trips to make to the government as it is still losing money.

There is a fear therefore that GMAC may add to the taxpayer bill further and there a pre-packaged bankruptcy would be a wiser option.

Watch the events unfold as they will have massive ramifications from a market point of view.

Disclosure: No positions.

Comments

[Paul Killinger:]

In for a penny, in for a pound.

That pretty much sums up the status of the federal "takeover" of the U.S. auto industry. The question that remains is can our government make the extraordinarily difficult decisions to put this primary domestic manufacturing industry back on track to any sort of future profitability?

The problem is we produce too many vehicles, too many of the wrong vehicles, and too many vehicles of questionable quality. If we fold Chrysler into GM, can the new company survive? If GM were allowed to go bankrupt, wouldn't this benefit Ford? These and other questions need quick answers, but we can't get them without an independent and knowledgeable Car Czar.

Only someone with the ability and reputation of Jack Welsh, the former legendary CEO of General Electric, could possibly sort this out and hope to turn it around. Failing the appointment of Welsh or another individual of his caliber to head up such an all out effort, the betting here is that Detroit is doomed.

Jan 07 11:28 AM