GM May Need A Loan, And Soon

[Blake Noble]

If conditions in the auto industry don't start improving soon, General Motors will have to start looking for coins between the seats of its vehicles.

The automaker currently has $24 billion in cash and another $7 billion in undrawn credit lines--plenty of liquidity, it says, to sustain its global operations through 2008. But will it be enough to limp through the economic downturn swamping the company's recovery efforts? Maybe not, say analysts, who expect General Motors (nyse: GM - news - people ) may need to tap the credit markets for as much as $9 billion over the next two years.

Not as easy as it sounds. While credit markets are loosening up a bit, GM might have some difficulty selling bonds, says GimmeCredit.com's Shelly Lombard, because lenders are already heavily exposed to automotive debt from Ford Motor (nyse: F - news - people ) and Chrysler. "There's a price at which they can raise bonds," she says--12% to 13% yield, she figures--"but they probably don't want to pay that price."

More likely, she says, GM will seek less-expensive bank debt by offering assets (perhaps some of its healthier foreign subsidiaries) as collateral. Ford mortgaged virtually the entire company in fall 2006 to secure a $23 billion credit deal. "Even so, it's tough," says Lombard. "Banks are not in any condition to do a lot of leveraged lending right now. But if you can get anything done in this market, it's in the secured market."

GM officials aren't commenting on the eve of Tuesday's shareholders meeting, at which Chief Executive G. Richard Wagoner is expected to disclose various strategies to curb spending and conserve cash. J.P. Morgan Securities analyst Himanshu Patel says these might include eliminating the $600 million annual stock dividend, making salaried job cuts and other restructuring actions. On May 29, GM said 19,000 hourly workers (25% of its total) had agreed to take early retirement packages, which Patel says will save the company an estimated $2 billion.

GM keeps trying to adjust to a shrinking market, but the problem is that its recovery effort is running into severe headwinds company executives didn't anticipate: a worsening economy, higher prices for steel and other raw materials, and $4 gasoline, which is killing sales of its most-profitable trucks and sport utilities.

On top of that, says Lombard, "they're being pecked to death by ducks"--a reference to the many cash outlays GM is facing in an attempt to put its legacy problems behind it. In all, GM has agreed in recent weeks to write $1.7 billion in checks to escape those problems--$200 million to help settle a strike at American Axle, $650 million to support bankrupt Delphi (other-otc: DPHI.PK - news - people ), $375 million as a potential backstop to GMAC's (nyse: GJM - news - people ) troubled Rescap mortgage subsidiary, and $826 million to repurchase its headquarters.

GM predicts an uptick in the economy in the latter half of the year. But with sales of high-profit trucks and SUVs tanking, Lehman Brothers analyst Brian Johnson expects GM to burn through $7 billion cash this year--potentially more, if steel companies hit the automaker with additional surcharges, as some expect. That would leave GM with $17 billion in cash at year-end, Johnson estimates.

That would put GM's liquidity in danger. To weather a downturn, GM Chief Financial Officer Raymond Young says the company needs at least $18 billion-$20 billion in cash, plus access to another $4 billion-$5 billion in credit lines.

With continued losses in North America, Lehman Brothers expects GM to burn about $10.3 billion in automotive operations between now and 2010, including $8.4 billion in cash and $1.9 billion in restructuring costs. Without refinancing its debt or drawing down the $7.3 billion credit line, GM would be down to $7.9 billion in cash by 2010, Lehman says. Since it needs $10 billion to $12 billion in working cash to fund operations, GM would need to find additional financing, Lehman says.

GM has $9.1 billion in debt coming due by January 2010, including $4.3 billion of long-term debt and a $4 billion note owed to a new trust fund for retiree health benefits. If the company can refinance that long-term debt, "that would be huge," says Lombard.

In the first quarter, GM did refinance $400 million of debt through foreign markets. It's a good sign, at least.

http://www.forbes.com/business/2008/06/30/..._jm_0602gm.html

[daves87rs]

Hmmm..more of a wait and see deal.

It depends on where sales go from here...

[FUTURE_OF_GM]

Like I said.. GM is a charity now.

They'll be milked dry by other LESSER companies and by the UAW.

I'd expect bankruptcy before the leaders of GME even have a chance to run the company into the ground.

[VenSeattle]

Most of the upcoming products are cars and they should be extremely competitive and classleading for the most part.

As the market switches, GM could be there with great product to keep their truck/SUV owners in the family. Let's hope at least.

[thesource]

The UAW has stopped the milking with wage/benfit reduction, the CAW still continues to milk them. Now there crying cause truck plant is closing here in Canada. CAW needs to do what the UAW did or else the boat will continue to sink.

[97regalGS]

GM is in deep $h!. they needed another 18-24 months before gas prices went thru the roof to convince people that their cars are half-way decent.

[buyacargetacheck]

Between a declining dollar (fueled by increased credit requirements across the economy) and continued highs in oil prices, the next two years are going to be extremely difficult for GM. Here's what nobody is predicting: sales of the vaunted 6-cylinder Epsilons (and all 6-cylinder cars for that matter) are going to take a hit. The 4-cylinder Malibus will still sell, but they won't grow proportionally to the decline in 6-cylinders. The compact market will take the slack like we saw in the 1980s with the Escort and Cavalier both of which regularly outsold their larger sisters. GM needs to be prepared for this. The new Delta had better be spectacular in every way for Corolla and Civic buyers to even consider it. The revamped Focus and upcoming Fiesta, meanwhile, is going to make GM's life hard too.

Net: GMNA's continued existence as we know her depends on heavily on Cobalt sales. Scary thought.

[Intrepidation]

Here's a thought: cut the exec's pay, most of them don't deserve anywhere near the amount they get (I'm talking to you Wagner). That should free up a few million easily. While the unions can be a paid in the ass, they money they get is nothing compared to the overpaid higher-ups. Can you blame them for fighting tooth an nail to prevent pay and benefits cuts when Ricky is making something to the tune of 15 million annually? If I remember right, Wantabe makes like 3-5 million...and Toyota makes far more money and is in far better shape.

Edited June 6, 2008 by Dodgefan

[CARBIZ]

BLAH, BLAH, BLAH...suddenly it's 2005 again?

Everyone knew about gas prices (maybe not THIS high, but nonetheless, everyone knew.) Everyone also knew 2008 was going to be rough.

So what. Maybe the U.S. should bomb Iran so the press has something else to fuss about..

[VenSeattle]

Between a declining dollar (fueled by increased credit requirements across the economy) and continued highs in oil prices, the next two years are going to be extremely difficult for GM. Here's what nobody is predicting: sales of the vaunted 6-cylinder Epsilons (and all 6-cylinder cars for that matter) are going to take a hit. The 4-cylinder Malibus will still sell, but they won't grow proportionally to the decline in 6-cylinders. The compact market will take the slack like we saw in the 1980s with the Escort and Cavalier both of which regularly outsold their larger sisters. GM needs to be prepared for this. The new Delta had better be spectacular in every way for Corolla and Civic buyers to even consider it. The revamped Focus and upcoming Fiesta, meanwhile, is going to make GM's life hard too.

Net: GMNA's continued existence as we know her depends on heavily on Cobalt sales. Scary thought.

Fortunately, IIRC, GM's two-mode system will eventually be made available on the Epsilon II V6 vehicles. How much that Impacts or improves their performance/fuel efficiency will determine more than anything if the Epsilon II V6 sedans will take a major hit. The cost of all cars will be increasing, but luckily the two-mode system is becoming more affordable as it's rolled out across line-ups.

[cdnsolman]

I wonder how much the UAW and CAW will be complaining when GM closes every plant in all of North America due to financial trouble. The unrealistic wages and benefits they are demanding are what's sinking the company. The compromise will seem like a bargain after none of them have any work.

I hear Honda is hiring for 1/2 what they make at GM. Maybe they can settle for that in a couple years.

[buyacargetacheck]

Let's hope that it helps sales. Of course, cost/benefit is key.

Fortunately, IIRC, GM's two-mode system will eventually be made available on the Epsilon II V6 vehicles. How much that Impacts or improves their performance/fuel efficiency will determine more than anything if the Epsilon II V6 sedans will take a major hit. The cost of all cars will be increasing, but luckily the two-mode system is becoming more affordable as it's rolled out across line-ups.

[SoCalCTS]

It's too bad that GM doesn't have any cars to export to take advantage of the week dollar.

[gmcbob]

So what's going to happen here in the next couple of years?

I'm noting quite a bit of speculation in the tone of these articles about GM's cash position. I think in the case of this article, and another recent WSJ article I saw recently on the speculation of a GM bankruptcy sometime before 2010, the media is giving us a worst case scenario situation that hinges on a market that is much worse than it probably really is.

A couple of things I find odd about all of this over the last few years is how Wagoner has maintained his position as CEO. I think in many other industries he would have been fired. I'm not saying he's doing a bad job, or a good job, but Wall St. and investors in large companies like this want to see fast change. And let's face it, watching GM start to bring competitive product to market has been like watching an entire NFL football game in super slow motion - and lets just say that GM is keeping it close, but there's been a lot of bad injuries and some pretty lousy 3rd downs where they are forced to punt (like keeping the 4 speeds out too long and not having the Cobalt up to snuff - I think not having a 6 spds in the trucks is a mute point now, but that was more like going for 2 after a TD and not making it). Anywho...it's fishy that the board still thinks that current management has their sh*t together, when I'm really beginning to wonder what they're thinking.

There's still this skeptic in me that GM is making their costs look high on paper (leading to losses) to continue to have an excuse to shed labor they don't need. Don't flame me for that - just a strange speculation I have.

Also, they're still spending money on purchases like their own headquarters and now Cobasys, which seems odd for a company that's being scrutinized by Wall St as being nearly broke. Although these 2 moves could prove to be strategically pretty good for many different reasons.

Edited June 6, 2008 by gmcbob

[CARBIZ]

So what's going to happen here in the next couple of years?

I'm noting quite a bit of speculation in the tone of these articles about GM's cash position. I think in the case of this article, and another recent WSJ article I saw recently on the speculation of a GM bankruptcy sometime before 2010, the media is giving us a worst case scenario situation that hinges on a market that is much worse than it probably really is.

A couple of things I find odd about all of this over the last few years is how Wagoner has maintained his position as CEO. I think in many other industries he would have been fired. I'm not saying he's doing a bad job, or a good job, but Wall St. and investors in large companies like this want to see fast change. And let's face it, watching GM start to bring competitive product to market has been like watching an entire NFL football game in super slow motion - and lets just say that GM is keeping it close, but there's been a lot of bad injuries and some pretty lousy 3rd downs where they are forced to punt (like keeping the 4 speeds out too long and not having the Cobalt up to snuff - I think not having a 6 spds in the trucks is a mute point now, but that was more like going for 2 after a TD and not making it). Anywho...it's fishy that the board still thinks that current management has their sh*t together, when I'm really beginning to wonder what they're thinking.

There's still this skeptic in me that GM is making their costs look high on paper (leading to losses) to continue to have an excuse to shed labor they don't need. Don't flame me for that - just a strange speculation I have.

Also, they're still spending money on purchases like their own headquarters and now Cobasys, which seems odd for a company that's being scrutinized by Wall St as being nearly broke. Although these 2 moves could prove to be strategically pretty good for many different reasons.

Excellent points, and that is something I was wondering, too. Like I said in another thread: Ottawa is already rushing to shower GM with cash NOT to close the Oshawa truck plant. GM dumped GMAC and now Cerebrus looks pretty foolish, don't they? It seems to me that there has been a few shrewd chess moves made in the last year or so and I can't wait for the next move. I checked out the credentials of the Board and there are some pretty top notch people there - and from quite a variety of different business/professional backgrounds. Either they are all idiots, Wagoner is an amazing salesman, or there are a few aces up their sleeves to play out yet.

Remember, GM brought their top negotiator from Asia last year to tackle the labor cost issue. From what I've heard, this guy is no fool. It seems to me that if the CAW/UAW is beingn so intractible, then GM can always get them through a side door.

[ZL-1]

Not much to comment there: the article goes right to the point of what GM's issues are, financially, but it is an interesting article. Thanks for posting YJ!

Edited June 7, 2008 by ZL-1