Insolvency Near For GM and Ford Without Government Bailout: 3rd Quarter Results

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November 12, 2008

Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business. Looking into the first two quarters of 2009, even with its planned actions, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing. The success of GM's plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe.

General Motors Press Release announcing 3rd Quarter Results – November 7, 2008



This past Friday, General Motors (chart set, 8k) and Ford ( 3Q presentation) released their very troubling 3rd Quarter financial results. GM announced that it had lost $2.5 billion and Ford posted a net loss of $129 million. All things considering the operating loss was not a complete catastrophe given the sales slide, however the gross cash each company was carrying as of October 31 raises a red flag. Both companies had a staggering combined negative cash flow of over $14 billion during this period.

In the 3rd Quarter GM burned through $6.9 billion in cash reducing its cash position to $16.2 billion (Table 1). The cold hard fact is, in order for GM to stay in business the company had stated it must have at least $11 to $14 billion in cash on hand. GM’s cash position is now dangerously low. Keep in mind that the $16.2 billion cash available was as of the end of September and did not factor in the cash burn over the past month and a half. At the most recent burn rate GM’s cash positions could be at $14 billion.

General Motors Summary 2008 2007 0/U 2007
Revenue $ 37.9 $ 43.7 $ (5.8)
Net income $ (2.5) $ 42.5 $ (40.0)
Adjusted operating cash flow $ (6.9) $ (2.5) $ (4.4)
Gross cash $ 16.2 $ 30.0 $ (14.8)

Ford Summary

Revenue $ 32.1 $ 41.1 $ (9.0)
Net income $ (129.0) $ (380.0) $ 251.0
Adjusted operating cash flow $ (7.7) $ (1.3) $ (6.4)
Gross cash $ 18.9 $ 35.6 $ (16.7)

Table 1: General Motors and Ford 3rd Quarter Results

Ford’s situation is deteriorating just as quickly, yet Ford has more breathing room than GM. Even though Ford burned $7.7 billion in the quarter, the company had almost $19 billion in the bank and has a $10 billion credit facility that GM does not have. Because Ford is also a smaller company their minimal cash level is probably a couple billion less than GM’s. The exact number is not known. Also like GM, almost all of their global operations were in the red in the 3rd Quarter. The one bright spot was South America which showed an almost $500 million profit. GM showed a similar result. However, as the economic crisis becomes global, that could also change quickly. Morover, out of the two companies, GM is the immediate concern.

At the 3rd Quarter press conference GM made a number of announcements. Of significance was the company put an end to a possible merger with Chrysler and had decided to focus on the company’s own liquidity problems.

GM stated:

GM has recently explored the possibility of a strategic acquisition that it believed would generate significant cost reduction synergies and substantially strengthens GM’s financial position in the medium and long term, while being neutral or modestly positive to cash flow even in the near term. While the acquisition could potentially have provided significant benefits, the company has concluded that it is more important at the present time to focus on its immediate liquidity challenges and, accordingly, considerations of such a transaction as a near term priority have been set aside.

In addition to plans (press release) put in place last July to raise $15 billion, GM also announced additional initiatives to improve its cash position by $5 billion. The following is what GM outlined:

  • Operating actions announced July 15 remain on track, targeted at $10 billion in cash improvements through 2009
  • Asset sales of $2-4 billion in process, including Hummer, ACDelco and Strasbourg facilities
  • Additional actions targeted at further improving liquidity by $5 billion by end of 2009
    • 2009 capital spending reduced by $2.5 billion; key product and technology programs on track
    • Additional GMNA structural cost reductions of $1.5 billion
    • Further working capital improvements of $500 million
    • Further salaried employment cost reductions of $500 million
  • Engaging the U.S. government to aid the domestic auto industry

This agenda if successful will take time to realize the cost savings and improve the bottom line. The biggest casualty will be the reduced investment in product, which is critical to any possible recovery. The company plans to cut capital spending in the coming year from $9 to $4.8 billion. The company plans to follow through on a few key programs such as the hybrid – electric Chevrolet Volt. Selling assets and cutting cost will reduce their burn rate but only government aid could provide the capital infusion the company really needs right now. The company is acknowledging, with the credit markets still frozen and GM a risky bet for investors, the government is their only option given the time constraints they are under.

It does appear that GM is less exposed to the problems at its former subsidiary Delphi and its credit arm GMAC which have been a huge drain on cash the past couple of years. The following are GM’s assessment of both Delphi and GMAC from its 10k filing on November 10:

Our plans also assume that we will not be required to provide additional financial support to Delphi or GMAC beyond the level previously agreed to and that our trade suppliers will continue to conduct business with us on terms consistent with historical practice. According to the company, Delphi may not emerge from bankruptcy and GMAC’s mortgage lending business Residential Capital (ResCap) may cease operations (p10).

Since 2005, we have recorded charges of $11.7 billion related to the guarantees provided to Delphi. Due to the uncertainties surrounding Delphi’s ability to emerge from bankruptcy it is reasonably possible that we could record additional charges in the future, but we currently are unable to estimate the amount of range of such losses, if any (p111).

There continues to be a risk that ResCap will not be able to meet its debt service obligations, default on its financial debt covenants due to insufficient capital and/or be in a negative liquidity position in 2008. Additionally, ResCap’s ability to participate in any governmental investment program or the TARP, either directly or indirectly through GMAC, is unknown at this time.

In light of ResCap’s liquidity and capital needs, combined with volatile conditions in the marketplace, there is substantial doubt about ResCap’s ability to continue as a going concern. If unanticipated market factors emerge and/or GMAC no longer continues to support ResCap’s capital or liquidity needs, or ResCap is unable to successfully execute its other initiatives, it would have a material adverse effect on GMAC’s business, results of operations and financial position (p131).

The bad news continues to come in for GM as Deutsche Bank downgraded the company to sell from hold, with a price target of $0. Deutsche Bank is expecting the company may not be able to fund its US operations beyond December without government intervention through a “capital infusion” or “loan”.

"Without government assistance, we believe that GM's collapse would be inevitable and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy."

Furthermore, Deutsche Bank believes if GM avoids bankruptcy, current shareholders will not see a return.

In addition Barclays Capital downgraded GM as well. However J.P. Morgan analysts upgraded GM's bonds to a "buy."

J.P. Morgan analyst said:

"We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts."

GM’s long-term debt is rated as junk. GM's benchmark 8.375 percent bond due 2033 has dropped to 25.75 cents on the dollar, from 36.5 cents at the end of October. At the beginning of the year the bonds had traded at more than 80 cents.

I agree with the analysis, as GM’s debt would be protected by a government bailout of some sort. If the US government takes an equity position in the company as they have done with the banking bailout or potential lenders do the same, the current shareholders face significant dilution of the common stock.

All of this news has driven GM’s stock price to under $3 per share leaving the company with a market cap at approximately $1.5 billion (Graph 1).


Graph 1: GM One-YearStock Price as of November 11, 2008

Now that the merger talks are off, it leaves Chrysler’s future in question again. Not much is known about the company’s financial condition; however, it can be assumed its problems are just as severe as GM and Ford's considering Chrysler generates almost all of its revenue from North America. Now that a merger with GM is officially on hold, Chrysler owner Cerberus is exploring its options according to the Detroit News. There is talk that a Renault-Nissan deal may be pursued again or speculation the talks with GM were just put suspended to encourage a government bailout without the shadow of pending job losses that would be expected if Chrysler were to be absorbed into GM.

In a recent statement after GM’s statements were released, Chrysler CEO Robert Nardelli stated:

"As an independent company, we will continue to explore multiple strategic alliances or partnerships as we investigate growth opportunities around the world that would aid in our return to profitability."

The Bailout
There is mounting pressure on the government to do something quickly to aid the US auto companies. As I discussed in US Auto Sales Collapse Again In October 2008: Looming Bailout Motives there are millions of direct and indirect jobs and hundreds of thousand of retiree’s pensions at stake if the auto companies fail.

Recently, Democratic lawmakers said federal aid could come with "strong conditions," such as requirements that auto companies build more fuel-efficient vehicles and equity stakes for the government so taxpayers could profit if the companies recover. Many in congress are calling for the Bush administration to uses the already appropriated funding for the auto companies in support of fuel efficient vehicles or the money allocated for the banking industry bailout.

Speaker of the US House of Representatives has said:

"Emergency assistance to the automobile industry would be conditioned on executive compensation restrictions, a prohibition on golden parachutes, rigorous independent oversight, and other taxpayer protections to ensure that any companies that benefit from this assistance -- and not the taxpayers -- bear the full burden of repaying any costs that are incurred."

I have just read through the Department of Energy’s Advance Technology Vehicles Manufacturing Loan Program Interim Final Rule just published and do not believe the program is sufficient for the times as it is cumbersome and restrictive. In summary auto manufacturers and suppliers would need to apply and receive approval for funding specific fuel efficient vehicle programs. Unless the Energy Department rubberstamps applications, this could take many months before loans are approved. In the case of GM, they may not have months.

From the preamble of the interim final rule:

Section 611.101 of this interim final rule sets forth the information DOE will need an applicant to submit in order to make the determinations required in section 136 and this interim final rule for issuance of a loan or award.  Applicants may submit loan requests for multiple eligible projects in a single application provided that the application provides a way to segregate each proposed eligible project in such a way that permits DOE to evaluate each project in the application. Applications for the first tranche of loans may be submitted or hand delivered to the Postal Mail address listed in ADDRESSES. DOE will consider and evaluate substantially complete applications as and when they are submitted during the first tranche period, which will close December 31, 2008. DOE may make decisions on such applications and close loans with respect to such applications at any time.

I also do not believe the $700 billion banking bailout is the correct facility to loan money to the auto makers because the legislation appears to be restricted to banking entities unless there is an amendment to that legislation. Currently, the auto companies’ finance operation can receive aid but not the automotive operations. New legislation is likely needed or the current banking bailout bill expanded such that a cash infusion will be direct, quick and efficient.

Yesterday, US President-elect Barak Obama urged President Bush to pass a second stimulus package to help the US economy and asked him to use existing bailout measures to help the auto industry.

In response the Bush administration stated:

"We're open to ideas from Congress to accelerate funds they've already appropriated in the auto loan program -- as long as funding will continue to go to viable firms and with strong taxpayer protections."

In a video interview with GM CEO Richard Wagoner, he appears to be willing to work with the US government to establish the best deal for the taxpayers including commitments for designing energy efficient vehicles and salary caps for executives.

The numbers do not lie and if the US government wants to preserve jobs and a domestic automotive industry, a direct capital infusion must happen within the coming weeks. GM in particular is in the process of making large cuts in plants, future product, R&D, labor, employee benefits to preserve what cash they can. If these cuts are prolonged, there will be irreparable long-term damage to the company. Ford has the capacity to weather the economic storm for now but their day will come if the economic down-turn is long enough and a government bailout does not happen.

How the government will handle Chrysler is a concern. Even if the economy was healthy, Chrysler would have a hard time surviving on its own. However, Chrysler’s owner Cerberus is also politically well connected with former Secretary of the US Treasury under President Bush, John Snow its Chairman. This should guarantee the private company receives its share of the government funds but will the government takes an equity stake and how will Cerberus address restrictions on executive compensations and golden parachutes?

With a bailout all but certain, how much money will each company receive and how will it be structured remain unanswered. GM and Ford should have a good chance of surviving the economic climate with enough liquidity as their leadership is strong and both companies have been taking drastic action to restructure for years now. Chrysler still remains the company to watch. With a bailout and without a strategic partner, Chrysler would be cash rich but still very poor with a limited global reach. Fattening the company’s balance sheet could entice Renault-Nissan to take the next step and consummate a deal. But in today’s environment I fail to see why they would.


Some G.M. Retirees Are in a Health Care Squeeze, NY Times, November 2008

Detroit will never be the same, Detroit News, November 2008

GM may run short of cash next year, Detroit News, November 2008


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