Can GM Make It?
General Motors is staggering and in desperate need of cash. What levers can the auto giant pull to save itself from bankruptcy?
by David Kiley
At the close of business on Oct. 9, General Motors' (GM) market cap stood below what it was in 1929 and down more than 94% from its 2000 peak of $52.4 billion.
At its low in Thursday's trading, GM's market capitalization stood at $2.6 billion. The automaker's market cap was about $4 billion (about $48 billion in today's dollars) when the stock market crashed in 1929. GM closed at 4.76 on the New York Stock Exchange. Over the last 52 weeks, GM's high was 43.20.
Balance Sheet Issues
The automakers' shares are being hammered because their balance sheets and cash burn were already a problem before the investment calamity that forced the U.S. government to approve a controversial $800 billion bailout.
GM, its dealers, and would-be car buyers are all suffering from lack of access to credit. "Action to establish some normalcy to credit markets is important to our industry, period," said GM President Frederick Henderson.
Rating agency Standard & Poor's said Thursday it was reviewing GM and Ford for further downgrades based on grim forecasts by firms like J.D. Power & Associates that the industry will sell 2 million fewer vehicles to consumers in 2008 than last year (BusinessWeek.com, 10/8/08), and that the cratering of demand for new vehicles will last through next year. The ratings being reviewed by S&P include the B- long-term corporate credit ratings for both Ford and GM, along with the B- long-term counterparty credit ratings for the two companies' respective financing arms, GMAC and Ford Motor Credit. The ratings already indicate the companies' debt is below investment grade. "While the global automotive industry is clearly experiencing a slowdown in 2008, the global market in 2009 may experience an outright collapse," said Jeff Schuster, J.D. Power's executive director of automotive forecasting.
S&P said it believes both automakers have enough cash for at least the rest of 2008, but rapidly worsening industry conditions will make things tough for them in 2009. Fitch Ratings said this week that it believed Ford could be down to $8 billion to $10 billion in cash by the second half of 2009, which is the minimum a car company the size of Ford needs to fund day-to-day activities.
No Help from Financing Arm
GM lost a stunning $15.5 billion in the second quarter, and its cash stood at $24 billion. At that time, it was burning $1 billion a month of its reserves, but the rate of burn is thought to have increased in the recent Wall Street meltdown. The next 60 days will be critical, said GM's Henderson, who is watching to see if the credit markets loosen up after the U.S. government rescue package starts taking effect and European government actions kick in.
The automaker is beating the equivalent of corporate couch cushions for cash. It is, for example, trying to borrow between $250 million and $500 million from Detroit city pension funds using its corporate headquarters building as collateral. That amount of money is not enough to fund even one vehicle program.
Besides falling demand for cars and trucks, GM does not have the backstop of its GMAC finance arm, which for years earned huge money from auto and home loans. To raise money, GM sold a controlling stake in the finance subsidiary to Cerberus Capital Management, and the credit arm has been hit by the subprime loan problem that has rocked Wall Street and world markets.
To raise additional cash, GM has floated the idea of selling the public stock in its European operations, which could be spun off. But the success of that strategy is now in question given the spread of U.S. economic problems to Europe and Asia.
Much more here: http://www.businessweek.com/print/lifestyle/content/oct2008/bw2008109_718575.htm