Ford, GM on the Chopping Block? 37 comments
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For years now, the demise of the Big Three has seemed like only a matter of time. None of the companies, Chrysler, Ford (F) or GM (GM), has been profitable for years.
On top of that, all three have significant debt burdens. As a result, all three have taken a pounding from the credit rating agencies. Of the three, Ford leads the pack with a B credit rating from S&P, while GM and Chrystler hold B- ratings, all firmly in junk territory. Remember, there was a time when GM had a AAA credit rating.
So here's the question: could the current credit crisis spell the end for the Big Three?
In the following rant, I chose to focus solely on GM and Ford, ignoring Chrysler, because it is now privately held and its financial statements are no longer available to the public, but just trust me that the same holds more or less true for them.
Right now, both Ford and GM are literally bankrupt. Both companies' liabilities are greater than their assets, resulting in negative equity. For GM, this has been the case since 2006. Ford only joined the club following their huge 1H loss earlier this year. Both of these companies would have filed for Chapter 11 long ago if they were not considered to be so vital to the American economy.
As far as I can tell, creditors are only willing to lend them money, based on the perception that the US government will be forced to intervene. In 2007 GM and Ford generated $182 Billion and $172 Billion in revenues, respectively, placing them in the 3rd and 7th places in the Fortune 500, respectively.
Additionally, Ford employs about 87,700 people, whereas GM employs a whopping 266,000. These are truly huge companies. Additionally, for every direct job created, approximately six indirect jobs are created. Therefore if these companies were to simply close their doors tomorrow (not going to happen, but I will get to that later), it could result in a loss of approximately 2.1 million jobs.
Why are Ford and GM in such bad shape? Well, for starters, they have been losing money for years, but that is actually not the most serious.
As I stated above, both Ford and GM are actually bankrupt. Looking at the companies' most recent balance sheets, both of them have negative equity. Ford's deficit stands at -$1.7 Billion. This means, that Ford owes 1.7 Billion more dollars than the total worth of the firm's assets. GM's equity deficit amounts to a gargantuan -$57 Billion. There is no way in hell they can dig themselves out of this hole. To get back in the black, GM would have to make $19 Billion a year, a 14% ROA, with capital expenditures never exceeding depreciation and no dividends paid.
Mind you, the company has lost $39 Billion, $2 Billion and $10 Billion in 2007, 2006 and 2005, respectively, and they are well on their way to another record loss this year, already posting a $15.5 Billion loss in the first half of 2008, with an 18% drop in revenue.
The worsening economy is going to pose two distinct problems for GM and Ford: greater losses and a more difficult time refinancing. As everyone knows by now, during the height of the age of gluttony, Americans were buying bigger and bigger cars, trying to keep up with the Joneses, as the bigger the car, the more powerful the status symbol.
Naturally, Ford and GM shifted their production lines to fill the SUV niche. However, as oil prices have risen and the economy has tanked, Americans have shunned their Hummers, Excursions and Suburbans. Naturally, it takes time and money to retool an assembly line and introduce new vehicles, two things GM and Ford are short on.
As a result, both companies are stuck with a vehicle fleet that few want to buy. The rise in oil prices has already wreaked havoc on Ford's and GM's income statements, now they are going to have to contend with a massive economic slowdown, consumer defaults and a lack of banks willing to give out auto loans. Ford also has about $106 Billion in consumer loans to auto owners - through their financial subsidiary - on their books. It'll be interesting to see what happens when those start going up in smoke.
Despite the fact that both Ford and GM will likely take enormous losses over the next few years, as long as they have a steady supply of credit, they will be in business. Ford is already so desperate for loans needed to keep going that they have pledged their logo as collateral. Nevertheless, the recent credit crisis has spooked investors, who have been shying away from just about everything except for government bonds.
Interestingly enough, while Ford's balance sheet is divided between two sections, Ford Automotive and Ford Financial, seemingly independent subsidiaries of the same parent company. Of Ford's $166 Billion in debt about $140 Billion is on Ford Financial's books, while the remaining $26 Billion lies with Ford Automotive.
Now on to the interesting part: on Ford's consolidated Balance Sheet, there is separation between short-term debt and current portion of long term debt and plain old long term debt. Analysts often like to have these things separated out, so they can evaluate things like working capital and a number of credit ratios relating to short term debt (Debt Service Coverage Ratio, short term debt/EBITDA, etc.). Why did Ford leave it out? A quick look on Yahoo finance reveals that Ford has quite a few bond issues coming to maturity in the coming year. Additionally, in their 2007 annual report, Ford had $41.1 Billion in debt coming to maturity and needing to be refinanced in 2008, $40.2 Billion from Ford Finance and $920 Million from Ford Auto. I somehow doubt that over the course of this year, Ford completely and radically restructured their debt, and that there is no debt coming to maturity, especially given the fact that according to Yahoo finance there is quite a bit. Why wouldn't Ford want its investors to know that it has a significant portion of its debt load coming up for refinancing when it is in effect bankrupt, stuck with a junk rating in the midst of the worst financial crisis since 1929?
GM is at least slightly more transparent, the company has a total of $40.5 Billion in debt outstanding, of which $8 Billion is short term, not all that different from Ford without its finance unit. This is largely due to the fact that they sold off 51% of their finance arm, GMAC, to a private equity fund in 2006. Nevertheless, it doesn't change the fact that they are going have trouble refinancing the debt.
Both Ford and GM are trying to resist bankruptcy filings by keeping mountains of cash on hand, in case their credit lines get pulled and they can't refinance their loans. At the end of Q2, GM had $19.4 Billion on hand, while Ford had $30 Billion. This may work in the short term, but in the long term their losses will eventually deplete their cash stockpiles.
2009 will be an interesting year for America…
Disclosure: none
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This article has 37 comments:
You are a little late on the news flash about GM & Ford. Your simply pointing out what has already been rehashed here and every other site a million times over.
From all of the analysis I've read, it will probably cost the US Government far less to prop up Ford and GM than it will if they let them go bankrupt. If you add up the direct and indirect unemployment costs, pension obligations, healthcare obligations etc., it is far cheaper to loan these two 25, 50 even 100 billion dollars to keep them going. I would love to here a congressman or senator explain to his/her auto worker constituents how they found 700 billion to bail out the greedy silk-suited millionaire bankers in NYC, but just couldn’t come up with 50 billion for an industry that accounts for 1 in 11 American jobs and produces something of tangible value and utility. I also believe roughly half of all US manufacturing problems are directly related to unfair trade and subsidies foreign governments give to their manufacturers. Since the US government has done almost zero to level the playing field, they are at lease partly responsible for the predicament Ford, GM and Chrysler find themselves in.
In the modern US economy, most Americans work in jobs that are pure overhead in the economy; Lawyers, servers, retail clerks, financial advisers, etc. I think some of these smug Toyota and BMW driving "overhead" workers will be shocked just how superfluous and peripheral there jobs are to the core economy in a serious recession. But they will probably still insist that all American cars are garbage and buying that Toyota had nothing to do with their plight.
How about our media get behind the American makes and write about the incredible quality strides made in the last five years, the multitude of choices in vehicles getting over 30 MPG, the world class panel fits, and the sharp rise in recalls by the Asian brands.
And how about writing about the trade laws that make Japan all but closed to American cars. And how about the fact that the Japanese government supports their auto industries in addition to OUR government giving THEM tax breaks.
Geez, we need another article like this like we need another bad market day! Whatever happened to the CAN DO attitude of the USA?
You dumb asses spout crap all day, get a job. The Ford pension is held in the Ford Motor Co. Retiree Trust Fund @ Comerica in Detroit MI. About 75% of the shit I've read on this blog sounds like it was written by Steve Glass. Any of you guys from The New Republic?
Also, why the comments about separating short-term and the current portion of long-term debt from the rest of long-term debt? This is standard practice.
The current portion of the long-term debt is what's due in the coming year. What do you mean "Why did Ford leave it out?" What did they leave out?
And why do you assume that when liabilities outweigh assets, a company is bankrupt? If so, a lot of companies, and families for that matter, are bankrupt right now, and have been for a long time. You don't count long-term debt, unless the current portion can't be serviced!
Additionally, why do you assume consumers are going to default on their car loans?
Please... a lot of people will buy into this... check your facts before you scare a lot of people unjustifiably!
"CNN Headline News did a short news listing regarding Ford and GM's contributions to the relief
and recovery efforts in New York and Washington.
The findings are as follows.......
1. Ford- $1 million to American Red Cross matching employee contributions of the same number plus 10 Excursions to NY Fire Dept. The company also offered ER response team services and office space to displaced government employees.
2. GM- $1 million to American Red Cross matching employee contributions of the same number and a fleet of vans, suv's, and trucks.
3. Daimler Chrysler- $10 million to support of the children and victims of the Sept. 11 attack.
4. Harley Davidson motorcycles- $1 million and 30 new motorcycles to the New York Police Dept.
5. Volkswagen-Employees and management created a Sept 11 Foundation, funded initial with $2 million, for the assistance of the children and victims of the WTC..
6. Hyundai- $300,000 to the Ame rican Red Cross.
7. Audi-Nothing.
8. BMW-Nothing.
9. Daewoo- Nothing.
10. Fiat-Nothing.
11. Honda- Nothing despite boasting of second best sales month ever in
August 2001
12. Isuzu- Nothing.
13. Mitsubishi-Nothing.
14. Nissan-Nothing.
15. Porsche-Nothing. Press release with condolences via the Porsche website.
16. Subaru- Nothing.
17. Suzuki- Nothing.
18. Toyota-Nothing despite claims of high sales in July and August 2001. Condolences posted on the website
Whenever the time may be for you to purchase or lease a new vehicle, keep this information in mind. You might want to give more consideration to a car manufactured by an American-owned and / or American
based company. Apart from Hyundai and Volkswagen, the foreign car companies contributed nothing at all to the citizens of the United States.
It's OK for these companies to take money out of this country, but it is apparently not acceptable to return some in a time of crisis. I believe we should not forget things like this. Say thank you in a way that gets
their attention..
Buy American
On Oct 08 03:29 PM AmericanVOR wrote:
> This is about the billionth article that says the same thing we've
> been reading for a few years now. Its almost as if outlets like this
> actually want the American automaker to die.
> How about our media get behind the American makes and write about
> the incredible quality strides made in the last five years, the multitude
> of choices in vehicles getting over 30 MPG, the world class panel
> fits, and the sharp rise in recalls by the Asian brands.
>
> And how about writing about the trade laws that make Japan all but
> closed to American cars. And how about the fact that the Japanese
> government supports their auto industries in addition to OUR government
> giving THEM tax breaks.
>
> Geez, we need another article like this like we need another bad
> market day! Whatever happened to the CAN DO attitude of the USA?
Lets get some level playing field here and do the rest of your homework. Absolutely nothing new here from you than reciting old data with same old storyline. How about a solution, like supporting our home team with some vehicle sales? I wish the media was fair just once in a while. The US needs GM - Ford and other companies to survive and thrive, lets lend a hand.
Buying a Ford made outside the US
or
Buying a Toyota made in the US
Buying a Ford made outside the US
or
Buying a Toyota made in the US"
Buying the Ford. Ford, and GM are global companies. They import AND export. The profit goes here.
The reliability of American cars has gotten better, but in this car class the Toyota is better than the Jeep. And this just makes me angry.
You know what would make me buy a Jeep instead of a Toyota? Simple (and I thought this a year ago when Bill Ford started doing his reliability commercials for Ford), don't charge me for your best, longest mileage and time no deductable extended warranty... just give it to me. Show me that you, as the car builder, have such faith in your product that you are willing to stand behind it for years and miles down the road.
How is a buyer supposed to feel when buying a $30,000 vehicle when the salesman then tries to sell a $1,200 extended warranty becasue you'll need it?
Summary of eRumor:
This message says that although U.S. car manufacturers have donated generously to the victims of the Attack on America, the foreign car makers have not. Some versions of the message say the originator surfed the internet and checked out each company’s website to assemble the list. The eRumor closes with the suggestion that if you’re going to buy a car, buy American.
The Truth:
The donation picture could change as time goes by so these figures should not be taken as the final accounting, but they do clearly demonstrate that foreign car makers are helping the victims of 9/11.
FORD Motor Company
$1 million to the Red Cross. A pledge to match employee donations. $550,000 from the Ford Facilities and Dealer groups. $1 million from the UAW’s Ford National Programs unit.
General Motors
$1 million to the Red Cross. Sixty vehicles donated to relief effort. A pledge to match all employee donations.
Daimler Chrysler
$10 million to support the children of victims of the attacks. Additional fund raising among employees.
Harley Davidson
$1 million donation. Thirty new motorcycles for the New York police.
Volkswagen
$2 million to create a foundation for giving to relief activities. Twenty-five vans given to the New York Fire department.
Hyundai
$300,000 in donations.
Audi
$100,000 to New York firefighters.
BMW
$1 million to the American Red Cross. One-hundred motorcycles to NYPD and 10 SUVs.
Daewoo
Owned by General Motors, so a part of GM's activities.
Fiat
Partners with GM and does not sell cars in the U.S.
Honda
Nearly $1 million to the American Red Cross. An employee donation program. Eight ATV’s to NYPD. Twenty electrical generators to the Red Cross.
Isuzu
Employee and company donation program in both the U.S. and Japan.
Nissan
$1 million split between the Red Cross and the Twin Towers fund. Also matching employee donations.
Porsche
Devoting portions of funds collected from several fund-raising projects.
Subaru
$532,000 to the American Red Cross.
Suzuki
Matching employee donations. Has given 25 all-terrain vehicles and five SUVs.has donated 25 all-terrain vehicles and five four-wheel-drive SUVs,
Toyota
$1 million to the American Red Cross. Matching employee contributions. More than $800,000 from American affiliates.
Sources:
Audi America
Ford Motor Company
The best way to get out of this mess.....IS TO BUY AMERICAN. 'nuff said!