Bloomberg reports that General Motors has tapped the remaining $3.5b of a $4.5b revolving credit line. (Needless to say, the bad news arrived on a Friday– the by-now usual pattern for the embattled automaker.) In an official statement, GM said the cash “will go to help cover restructuring costs.” Or, as Bloomie’s put it, “GM, the largest U.S. automaker, has said it needs to raise $4 billion to $7 billion by selling assets and adding debt to ensure it has enough liquidity to operate through the end of 2009. GM has lost $69.8 billion since the end of 2004, its last profitable year.” The reality is that Q3 will show another big loss; the loss might have put GM in violation of certain covenants/ratios in the loan agreement, which would give the bankers the right to deny funding and pull the line. Of course, we don’t know the details. But, as TTAC’s Deep Throat put it, this company is running close to the edge. Meanwhile, GM’s former captive lender GMAC (The General now owns 49 percent) renewed a credit facility with Citigroup yesterday. GMAC now has access to $13.8b, down from last year’s $21.4b.
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RF
Help me out with this business chapter 11 stuff.
I thought it a good idea when UAL took it and was able to cut lots of crap (other than the ones doing the cutting) and emerged a better company.
So, why would it be so bad for GM, and any company, to get the cover from Chapter11 and fix itself?
Wouldn’t this be a better route?
Wouldn’t this be better than you and I bailing it?
Wow. At this rate even GM’s share of $25B (or $50B) won’t keep them going long.
It seems clear that Ch. 11 would be the best way to go … is it ego, denial, or just plain stupidity that’s preventing them taking the logical step?
The argument against C11: no one will buy a car from a bankrupt automaker. It is also true that a filing would spell the end of Wagoner’s regime AND launch a great many lawsuits against the company.
The problem with that way of thinking: while it may be true, if C11 is inevitable (and I think it is, for what that’s worth), the longer you delay, the less money you have going in, the less chance you have of EVER coming out.
As for the psychology, GM execs’ denial is legendary. Literally the stuff of legends.
A few snippets from a WSJ article today:
GM executives said as recently as June that drawing down the credit line may send a negative signal to investors.
GM also said Friday that it completed a $322 million debt-to-equity exchange. The auto maker issued 28.3 million new shares of its common stock in exchange for a $322 million principal amount of its 1.5% Series D senior convertible debentures, which mature in June.
“Accessing the funds available to us is a prudent liquidity measure,” GM Treasurer Walter Borst said. “Drawing on the revolver now improves our liquidity position at a time when the capital markets have become more challenging.”
GM reported a $15.5 billion net loss for the second quarter, the third biggest in its history, and the entire business is in turmoil amid the U.S. economic slowdown. GM and its two Detroit rivals are being forced to ratchet back or phase out their leasing programs, long a linchpin of sales, because declining car values are undermining the economics of the business.
Proceeds from the draw will be available to retire $750 million of debt maturities coming due in October and to pay Delphi more than $1.2 billion as part of its reorganization efforts, if revised agreements between GM and Delphi are approved by the bankruptcy court.
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Running on fumes is right.
GM “said it needs to raise $4 billion to $7 billion by selling assets and adding debt to ensure it has enough liquidity to operate through the end of 2009”
There are two things I don’t understand about this. First, what’s left to sell? Second, since the cash is needed just to cover losses through the end of 2009, why should lenders be confident GM will actually be able to repay anyone in 2010?
Just finished reading a couple of headline articles over at Money.CNN.com regarding the latest financial bailout efforts. Freakin’ downright scary.
When (wealthy) senators are scared to death by what they’ve just been briefed on it’s the real deal.
I think the collapse of Detroit will be a simple footnote when (if) this nightmare is over.
I was a little disappointed that the title wasn’t an ode to Jackson Browne’s “Running On Empty”.
We have a ‘gotta have’ $700B or so bill about to be passed and signed. This is often when lots of extra and extraneous stuff, like an almost invisible $25B bailout, can be slipped in without much attention.
Robert, I have to dispute on your comment: “The argument against C11: no one will buy a car from a bankrupt automaker.”
And the question is, What’s the difference from bying a GM product now, and buying a GM product post-Chapter 11?
In my opinion, a buyer will face the same problems of service, loans and possible warranty claims before and after. If one buys a car now, and GM goes chapter 11, what will happen then? And would GM sell any car at all, if they wouldn’t back up their obligations afterwards? GM survives today solely to the assumption that everything will be just the same either way. And therefore, there should be no difference post C11. And if there were, why would anyone buy a GM product right now?
GM:s foundation today is so shaky that there really is no difference if they went chapter 11.
Take particular note of the comments on autos. Frightening parallels to today except for one huge difference, they had no outside competition then.
http://www.futurecasts.com
Scroll down to “Great Depression Chronology” then click on “The Crash of ’29”.
For what it’s worth it seems like there’s a lot more parallels then just autos.
@Ingvar: “What’s the difference from buying a GM product now, and buying a GM product post-Chapter 11?”
I think Robert’s point is a valid one, because I think that a large proportion of Detroit’s present customers do not realize how serious the position is, whereas everyone in the country would know if GM filed. But I do think if GM doesn’t go Ch. 11 soon, they may not be able to, and may be forced into Ch. 7, which would effectively be The End.
So, why buy a GM product NOW, if the company is going down?
Let me submit my opinion about Chapter 11 for GM.
Could this possibly be the senrero:
1. GM files for Chapter 11.
2. UAW immediately goes on strike to prevent GM from canceling the union contracts. North American production stops dead it its tracks.
3. GM dealers all over the country line up with their lawyers at court houses in every state sueing to get a piece of whetever is left over.
4. Delphi defaults on everything and is forced to put the North American division into chapter 7.
5. Top brass at GM open their golden parachutes and take the money and run.
6. The 537 idiots in Washington (100 senate, 435 in the house and the pres and vp) come up with another bailout plan worth a few 100 Billion/Trillion.
7. Ford and Chrysler immediately file chapter 11 to get their place at the public cash pile. UAW and dealers due to Ford and Chrysler what they did to GM.
8. Government goes to Toyota/Honda/Nissan/Hyundai and asked them to merge with GM/Ford/Chrysler.
9. All domestic automaker employees are seen running out of the offices and plants with cardboard boxes full of personal belongings.
10. Japanese and Korean now become the official language of the world wide auto industry.
11. 2 million illegial immigrants return to Mexico for all the jobs offered at the new auto plants being built.
12. UAW president Ron G says it is not the unions fault and asks for a government bailout.
OK, maybe 10 and 11 are a little off the wall but if you look at how the government has been handeling the financial problems with mergers and guarantees how will they handle Detroit? Who would the government force the mergers with other then foreign makers.
Scares the heck out of me.
So, why buy a GM product NOW, if the company is going down?
I don’t know how many people know how bad the situation is at the domestics. There are people who know about it and the potential of a GM filing may be affecting their choice of car. But not everyone watches the news and pays attention to quarter after quarter of billions of dollars of losses. A lot less people will read automotive blogs such as TTAC or financial newspapers like the WSJ which have discussed the likelyhood of a filing for a while. If GM were to file, it would be huge news. There would be few people who wouldn’t hear about it.
Oh, come on! The press reports as much about GM:s monetary situation as they do about the Volt. Even in Sweden. I can read in local newspapers on another continent about how bad in shape GM really is. I can not believe that the general public is that unaware. Detroit, UAW, bailout and all. And 1 in every 12 actually works in the car making industry.
RF, I’m waiting for that article on why Chp 11 wouldn’t mean the end of GM or any other automaker that you said you were going to pen.
Oh, come on! The press reports as much about GM:s monetary situation as they do about the Volt. Even in Sweden. I can read in local newspapers on another continent about how bad in shape GM really is. I can not believe that the general public is that unaware.
Gore Vidal once said “Half the American people never read a newspaper. Half never vote for President. The same half?”. I don’t think it’s that much of a stretch for some to either be completely ignorant of the situation GM is in or to not realize how serious it is.
Ingvar:
What’s the difference from bying a GM product now, and buying a GM product post-Chapter 11?
A 50 percent+ price cut. And no warranty (except via a 3rd party)
Under those conditions, who wouldn’t think hard about a new 4×4 Silverado extended cab. My price point is $8K.
And if UAW, dealer, and supplier brainstems go lawsuit and/or shut down production, Ford & Toyondissan just crank it up…
For what it’s worth – I’d buy a G8 at a half-price C11 sale. After all – it’s a Holden. Someone, somewhere, will be able to service it.
Someone, somewhere, will be able to service it.
If there’s enough vehicles out there, someone will make parts. Although you’ll pay for low volume animals like the G8…
This really grinds my gears. GM clearly has some great minds working for them. They are able to produce world class products (Lambdas, Malibu, CTS, G8, etc), and yet, they are sitting in limbo.
Why is it a car company can have the focus, drive, and ambition to build a great car like the CTS or Malibu, but not transfer some of that same drive and ambition to SAVING THE DAMN COMPANY?
First: I doubt that many people follow GM financials otherwise more sites would run GM deathwatch stories and i think that most people who do follow it expect a goverment bailout.
Second: A GM Ch. 11 would mean they would have to sell Daewoo and Opel/Vauxhall and without those GM is in even dire straits.
Third: This is an industry where some competitors are also your subcontractors. Do they really mind killing a competitor?
ps. Luxery brands are not bought on price. This would kill Cadillac assuming it is a luxery brand
If I was the treasurer of GM and took a look at what happened this week (Lehman Brothers BK, the AAA rated AIG essentially being liquidated, Wachovia and WaMu still on the ropes, questions about the viability of Morgan Stanley and Goldman), I would not hesitate drawing down on the revolver to make sure I had the funds available, despite the negative arb. Who knows the financial health of my counterparties if I needed to draw down on the revolver in the future?
I believe that the closest comparison is how hard the Bancrofts tried to hold onto a company (the Wall Street Journal) despite shares going into the tank, and a paper that was losing relevance by the day. Wagoner and his crew take pride in being the C level execs of one of the most visible manufacturing company in the world. Compounding things is the fat salary and benefits which make rich golden parachutes look like chump change.
I can’t believe whoever holds GM shares hasn’t booted all the crazies in charge of the company to make the hard decisions necessary. Then again, who are the crazies who knowingly hold GM stock (besides S&P passive investors)?
If I was the treasurer of GM and took a look at what happened this week (Lehman Brothers BK, the AAA rated AIG essentially being liquidated, Wachovia and WaMu still on the ropes, questions about the viability of Morgan Stanley and Goldman), I would not hesitate drawing down on the revolver to make sure I had the funds available, despite the negative arb
A WSJ article in Mondays’ paper agrees with you, but also cites concern about their being able to continue operation:
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“Given the tremendous uncertainty in the financial markets and the position GM is in, they’re better off trying to tap their lines now, rather than later and finding they can’t,” said Joe Phillippi, analyst at AutoTrends Consulting Inc. in Short Hills, N.J. But, he added, it could be a sign GM thinks the end of 2008 and beginning of 2009 will be tougher than initially anticipated.
In July, GM laid out a plan to cut costs by $10 billion and raise $5 billion in cash through a variety of measures, such as asset sales and new, secured financing. That plan was supposed to keep the company afloat through the end of 2009.
But GM’s has run into trouble meeting those goals. Banks have proved unwilling to help the company raise the $2 billion to $3 billion in financing that is a key part of its plan.
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Then again, who are the crazies who knowingly hold GM stock (besides S&P passive investors)?
The link below shows that 14 of the top 15 holders are bailing. I’d think they’d hang around until the bailout came through. Or maybe they doubt it will, at least in time.
http://moneycentral.msn.com/ownership?Symbol=GM