Fitch Ratings isn't overly interested in Detroit News columnist John McCormick's assertion that Motown's recent model introductions promise brighter days ahead for his paper's hometown heroes (Big 3 get it right with new vehicles). The hard-nosed financial analysts are more concerned with the cancer eating away at the Big 2.8: debt. The automakers' recent agreement with the United Auto Workers to establish a union-controlled VEBA health care superfund threatens to evoke that old saw about straw-carrying camels. While Fitch doesn't reveal the total financial burden weighing down The Big 2.8, they reveal that Ford's debt has grown by $21b since 2001, while GM added $31b worth of debt in the same time period. Uh-oh. "Increasing interest costs from higher net leverage will represent a more significant claim on operating cash flows," Fitch managing director predicted to Reuters. Mark Oline was quick to add that liquidity isn't [yet] an issue, but "with few assets left to divest, liquidity positions will likely drop through 2008." So, how low can you go?
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Credit is drying up in financial markets…so how will a credit crunch effect the Big 2.8?
In other news, the sky is blue and the grass is green.
It doesn’t look good for the big 2.801. But you reap what you sow. Detroit should have seen this coming a long time ago and have done nothing to prepare for it.
Sustainable and organic growth are the way forward. Just ask Toyota, Honda and Hyundai.
I think the “sustainability” of Toyota and Hyundai’s growth is in question.
How in the world can GM and Ford even attempt to pay back the debt? Their market share is declining, they don’t have a sufficient amount of new products (even if the public wanted the products) to rebound, they continue to give and apparently will have to continue to give huge rebates and incentives to get people to buy their products. The price of fuel is not good for them, the credit crunch and the public is buying fewer large (i.e. high profit) vehicles. The stock prices of the companies are taking a beating, and now the report they have actually and dramatically increased debt this decade.
Well, lucky for GM and Ford, most of that debt doesn’t have to be paid back for 30 years and can be refinanced when interest rates are lower and/or their credit rating improves.
Both companies have a massive string of new products on the way in the next 1-4 years, many of which are targeted directly at the fuel-efficient market. Sales of newly launched vehicles at both companies are doing very well and are profitable sales overall (save the GMTs). That’s right… the Fusion and Malibu turn profit. As both companies finish their product renaissance over the next 3-4 years, sales will naturally improve. Organic growth is, in fact, what at least Ford (if not GM) is targeting now from their smaller state.
Their problem is not the ability to pay debts or run their operations (Ford has almost $35 billion cash right now and both companies’ operations are cash positive even if their total cashflow is negative after investments and such). The question is can they finance additional debt. And, frankly, neither needs to at the moment.
If Ford, for example, turns profitable in 2009 as predicted, it is likely that even with their investments they will be cash positive by 2010, at which point they can really start servicing and converting their debt. After 2008 (assuming any economic slump ends by the end of the year), both GM and Ford should see better growth, stronger profit margins, cash flow, better credit ratings and a slow paydown of debt due to economic strength, new product lines and the fruits of cost-cutting and quality improvements.
It’s not all gloomy there. If both companies were still thinking that SUVs were the yellow-brick-road to Emerald City, I’d be concerned, but both companies seem to get it… it just takes time for their product lines to update and their balance sheets to improve.
OK, when we base everything on very rosy perdictions of the futre I guess everything will be OK.
The Malibu is way too new to have turned a profit yet. Whether or not it turns a profit depends on whether or not it’s selling well in two or three or four years from now. There are fixed costs (model specific costs such as the engineering of the new design, plant retooling, advertising for the launch, plus a pro-rated share of all other corporate-wide fixed costs) that have the be paid for no matterm how many they sell. Also, if it doesn’t sell well, they will have to add incentives to get rid of them.
GM cars usually start strong in sales and then quickly die. However, Toyota can somehow sell the exact same Corolla for five years with no loss of sales (sales growth, actually).
I have sat in and drove a 2008 CTS Direct Inject and sat in a 2008 Malibu. Both seem to be world class…
If Ford, for example, turns profitable in 2009 as predicted
Huh? Who predicted that besides Mark Fields?