GM bankruptcy possible

[jjs 60]

General Motors Corp will need to raise as much as US$15 billion in cash to shore up liquidity and bankruptcy is "not impossible" if the US car market continues to slump, Merrill Lynch has said.

Other analysts have suggested GM, whose shares fell to a new 54-year low on Wednesday, needs to raise funds to ride out the downturn in the US car market through 2009.

But Merrill's estimate of GM's financing needs is the highest yet. It also carried the most stark warning of the bankruptcy risk for the largest US carmaker.

GM declined to comment directly on the Merrill Lynch report but it believes it has sufficient liquidity for 2008 despite lower volumes and could take more steps to cut costs if sales conditions worsen.

"If conditions continue to deteriorate, we would consider other operating measures," GM spokeswoman Renee Rashid-Merem told Reuters.

Merrill Lynch analyst John Murphy cut GM to "underperform" from "buy" and lowered his price target for the largest US carmaker to US$7 from US$28. Shares fell as much as 11 per cent to US$10.50 in Wednesday's trading in the New York Stock Exchange. The cost to insure GM's debt rose.

Murphy also lowered his forecast for 2008 US industry-wide light vehicle sales for the third time this year and said the recent drastic decline in sales would likely to continue through 2009.

Murphy forecasts light vehicle sales of 14.3 million units this year and 14 million units for next year. That compares with 16.15 million units in 2007 and is sharply lower than the current forecast of most major carmakers, including GM.

"The recent extreme deterioration in volume and mix is driving much higher cash burn and eroding GM's cash position," Murphy said. "We believe US$15 billion is necessary because there is downside risk to our current estimates and a greater cushion is essential."

Any capital GM raises has the potential to dilute equity if it's done through convertible offering or the issuance of additional equity, both possibilities analysts have raised.

DEEPER DOWNTURN AHEAD?

The deepening concerns about the sales outlook for GM come after a June sales report that showed industry-wide car sales dropping to a 15-year low.

GM's own sales fell by a narrower-than-expected 8 per cent on an adjusted basis after the carmaker offered zero-per cent financing for six years.

But Deutsche Bank analyst Rod Lache said GM could see a "payback" from its June sale in coming months, with its US market share dropping back below 20 per cent from 22 per cent in June as sales fall back.

Several other Wall Street banks including Citigroup also downgraded carmakers and parts suppliers on Wednesday and lowered their outlook for US car sales this year and next.

Citigroup analyst Itay Michaeli lowered his forecast for 2008 US vehicle sales to 14.5 million units from 15 million, saying plummeting resale values of trucks and SUVs was crimping demand already hurt by weak housing and tighter credit.

Itay said a full recovery in the US car market would begin only in 2010 or 2011.

Michaeli said GM has to weather the current downturn with considerably less backup liquidity than smaller rival Ford Motor Co, which tapped the leveraged loan market at its peak in late 2006 to raise US$23 billion.

"While we do not believe GM is facing an immediate cash crunch, the urgency to shore up liquidity to navigate through a difficult 2008-2009 has risen significantly in recent months," Michaeli said. He cut GM's target price to US$14 from US$21.

Industry tracking firm Global Insight cut its forecast for the annualized sales rate in July to 14.4 million units and cut its 2009 forecast to 14.2 million units in sales, citing the risk of higher average oil prices in the months ahead.

Credit option contracts on the Chicago Board Options Exchange that would pay out if GM or Ford default before September 2012 ticked higher. The contracts, which remain lightly traded, point to a roughly 73-per cent default risk for GM and a 69-per cent risk for Ford over that period.

[hybrid 1039]

bush

[kiwi535 538]

i think its going to be an ongoing problem for the whole US industry.Some of the fault lies with the government in that light trucks are exempt from the fuel consumption (and co2 etc output)that other cars have to comply with.I would think the other US manufacturers would be in similar trouble.

[elmarco 56]

Chrysler is also cutting production and recently announced a plant closure. Not sure if the Japanese 3 (Toyota, Honda + Nissan) are affected, but Mitsi nearly went belly up in the US a couple of years back.

GM's most profitable vehicles are the big SUV's and trucks which have been getting a hammering in the last 12 - 24 months. It isn't easy or quick to turn a ship as big as GM (very beaurocratic as you would expect an organisation that size would be). They have known that they need more smaller cars for a while - it just takes time to get them into production and to change consumer habits. Even getting the Opel Astra (current production model in Europe) to the US wasn't all that easy as I believe it needed re-engineering to meet the SAE / DOT rules which are completely different to Europe (and NZ/Australia etc). Big $$ decisions and if they get it wrong, it can literally cost billions....

As kiwi535 says - it will be an ongoing problem until they get the product plans changed and in step with reality. There will always be a market for big SUV's and trucks, but nowhere near what it used to be (the Ford F150 was the largest selling vehicle in the US for a lot of years!!). Just hope they haven't left it too late...

One thing to note is that I believe it only affects the US - the GM Asia Pacific operations are doing very well from what I have read. And GM are not the most reliant on SUV and truck sales either - that honour goes to Chrysler if my memory serves correctly.