GM's spinning the fact that they're not renewing their $4.1b standby credit because they don't need it. Speaking to CNNMoney, GM spokeswoman Melisa Tezanos claimed GM never borrowed under the agreement and "a review of its capital needs for the first half of the year showed the auto maker had enough liquidity and flexibility with the standby credit pact." Texanos also said that the fact that the credit line was collateralized by GMAC "was not a factor" in GM's decision to terminate the credit revolver. We call bullshit. Our spy reports that the banks won't lend on the line since the GMAC security interest is worth less than the line, thanks to the strong potential of bankruptcy at GMAC/Cerberus-owned mortage lender Residential Capital. "Obviously, it's not good to admit you can't renew your line. Better to tell the story you don't need it now." But, they do. Although the automaker hasn't drawn upon the line of credit, it still relies on it as a backstop for certain financial transactions. Oh, and if RESCAP goes belly-up, how do you think that will affect GM's auto loans? This could get really nasty really quickly…
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So GM took out the line prior to the big 3rd Quarter hit. 4th quarter does not look good either and projections for the industry as a whole in 2008 are not exactly rosy. So how is it that they suddenly do not need this line? I admit I know nothing about high finance but it makes no sense to me.
It sounds as if they’ve never used their LOC, which is normal for a company with GM’s market cap.
I’ve never heard of a company cancelling its LOC because they didn’t need it. Large companies always seem to have a few extra LOC agreements sitting around if they are a going concern with decent cash flow.
From the article: “Calyon Securities analyst Mark Warnsman also said there are costs associated with carrying those credit lines and GM likely decided to terminate the agreement in the normal course of business.”
Is he talking about opportunity costs, or professional fees, or what? Is GM paying a servicing fee to some agency? I don’t recall any associated costs with any of the LOC agreements I’ve seen in 10 years of public accounting, but I could be wrong.
Is there even anything left to sell off and throw into the furnace to keep the company going if they need the cash?
BlisterInTheSun : Is he talking about opportunity costs, or professional fees, or what? Is GM paying a servicing fee to some agency? I don’t recall any associated costs with any of the LOC agreements I’ve seen in 10 years of public accounting, but I could be wrong. Banks typically charge a small fee per year for a line, like an eighth to a quarter of one percent. Of course, if you borrow, you pay interest. Assuming a quarter point per year, GM's cost on this line is– I mean, was– just over $10m per year. GM can't afford a multi-billion dollar line over $10m per year? That doesn't sound very encouraging…
Sherman Lin: Probably the only thing they have left to sell are those metal things with wheels that seem to be clogging up the pesky dealers’ lots.
Do they have any aircraft? They could sell them. Biz jets are not chearp.
It wouldn’t kill Wagoner and Lutz to fly coach and meet the people who actually buy and drive their products.
KixStart: It wouldn’t kill Wagoner and Lutz to fly coach and meet the people who actually buy and drive their products.
That would be rental company execs and their own employees.
It seems like it would have been prudent to keep the line available, since it’s not getting any easier to borrow money nowadays. Just ask Chrysler’s bankers.
Lichtronamo: LOL, good line.
I don’t understand them closing this at all – having $4B readily available outside of using cash is a very important asset. From reading I’d bet the banks wanted to increase the fees associated with keeping this LOC open due to funding concerns (interest rates / fees go up with risk) – only way to know is to see the lending agreement and clauses on fee escalation. GM closed it to save some money which means they can’t afford to pay a fee.
hltgy:
Even the employees are catching on – a relative is a GM retiree. He just figured out he can buy a 1-2 year old Envoy with low miles for about 1/2 the cost of a new one (even with the +/- 10% GMS discount price)