• GM filed after the close on Wednesday a brief, but in our view important, 8K regarding the status of the Settlement Agreement regarding UAW retiree healthcare coverage.
• Recall that this was the deal hammered out as part of the 2007 contract negotiation with the Union, that effectively will take GM out of the business of providing retiree healthcare (OPEB) beginning in 2010, in exchange for a hefty installment of cash
(upwards of $30 billion) into a new VEBA trust.
• The 8K reported that all conditions have been met and all appeals expired, allowing the deal to become effective (for all practical purposes) as planned on January 1, 2010.
• There was a very important word in the 8K that we think investors should not overlook: “Terminate.” As in, the retiree healthcare plan will be “terminated” on the final settlement date. This is distinct from a plan “amendment,” and as such will receive very different accounting treatment.
• The key distinction is that under settlement accounting (which applies for a termination) the gains/losses generated by the agreement (in this case, a “significant curtailment gain”) will be recognized all at once (in this case, in 3Q08), rather than amortized through the income statement over a period of years, as would have been the case under the amendment accounting treatment that GM was originally seeking (and how the 2005 benefit cut was handled).
• This is where it gets dicey. When GM originally outlined the expected 2010-2011 savings (P&L) that would result from the VEBA deal, which ranged from $2.6 – $3.4 billion per year, the company had assumed it would be amortizing a sizable gain as a result of amendment accounting. In other words, the initial ~$3b estimate included not only the elimination of service and interest cost, but also some extra (significant) help (non-cash, of course) from the amortization of that amendment gain.

[thanks to you know who you are]

As Edward Niedermeyer reported earlier today, the re-organization plan for Delphi pegs the bankrupt parts maker and former GM division’s worth at $7.2b (down from $12.8b). Delphi’s “valuation” is ridiculous; the company is still highly dependent on GM’s biz. Banking on GM is like entrusting a quasi-governmental lender to Rep. Barney Frank. To wit: today’s market cap for General Motors was under $5b, after the American automaker’s stock tumbled to its lowest level ($8.24 a share) in more than 54 years. Bottom line: Delphi is unlikely to emerge from bankruptcy; it will be liquidated. Meanwhile, let”s hope misery loves company; Fitch Ratings downgraded Ford’s credit to GM’s sub-basement level: CCC. Oh, and Fitch dropped Ford Motor Credit to the same rating (explaining Mazda’s decision to cut bait and fish with their own auto loan sources). Bottom line: the credit crisis is hitting GM and Ford (and Chrysler) at both the sharp end (auto loans) AND the macro-level (access to working capital). The center will not hold.

Delphi has been lingering in Chapter 11 for nearly three years now, with little relief appearing on the horizon. Automotive News (sub) reports that the GM spinoff has filed a new reorganization plan, which appears to more realistically reflect its predicament. In the new filing, Delphi’s worth is estimated at $7.2b, down significantly from the $12.8b value the firm was said to carry at the beginning of this year. With its only investor, Appaloosa Capital, having bailed, Delphi needs to raise $3.75b in order to emerge from bankruptcy. But that number doesn’t reflect the fact that the new plan calls for GM to make a $10.6b investment in its parts maker, including taking over $3.4b worth of pension obligations. In other words, GM must sink more money into Delphi than the part supplier is worth or risk a supply shortfall since other firms won’t touch Delphi’s GM contract pricing. And it’s not like GM has tons of cash just sitting in the bank to bailout its spinoff. This is where GM’s cash burn and supplier cost-shuffling come together to put the General between a rock and a hard place. There’s no word on if, when, or how GM is going back its struggling supplier, but a hearing is planned for October 23 and a final ruling should arrive by December 17. GM needs $10.6b by then to prevent its entire business from crumbling. Otherwise, Delphi goes to Chapter 7 while GM begins a bankruptcy court adventure of its own.

A study by Experion Automotive reported in Automotive News (sub) shows that nearly $25b in US auto loans are currently delinquent. In the second quarter of 2008, some 2.48 percent of all auto loans were 30 days past due according to the study, and .75 percent are 60 days past due. Both number are up noticeably compared to last year. All in all, there’s little in the way of encouraging news in the Experion report. Only the percentage of delinquent loans made to those with good credit scores (680+ on the 300-800 scales) is actually down, dipping to 56.5 percent compared to 61.1 percent last year. Well, that explains why auto loans are now considered “distressed assets.”

State Department “undesirable” and reportedly mobbed-up Russian oligarch Oleg Deripaska has given up his 20 percent share in contract manufacturer and supplier Magna International. Marketwatch reports that Deripaska had bought into Magna in order to reap expertise in developing his own Russian-based automotive empire, but the credit crunch has him backing out. In fact, Deripaska had laid his 20m Class-A Magna shares as collateral for their purchase, and thanks to major retreats in the Russian stock market, Deripaska is simply walking away from his $1.54b investment. Magna stock has dropped 45 percent since Deripaska bought in, further exasperating his position and forcing his Basic Elements holding group to repritoritize. Meanwhile, Magna is happy to have had the opportunity to gain access to Russia’s auto manufacturing market, through the Deripaska-owned GAZ Group. Though Deripaska’s stake in Magna will be sold off by an unnamed creditor, collaboration could continue between the two firms. “We believe that the Russian market still holds significant opportunities for us and intend to continue to pursue joint opportunities with Russian Machines and GAZ, as well as other opportunities to advance our position in Russia,” says Magna co-CEO Siegfried Wolf.

Fiat and the European Auto Makers Association want an American-style multi-billion handout, STAT! Marketwatch reports that FIAT is leading the charge, demanding $55.22b in European Commission loans to “help Europe’s car makers make better environment-friendly vehicles.” Did I say demanding? Yes, I did. “All European car makers agree on the [€40 billion] demand,” a spokesman for Fiat said Saturday, confirming earlier remarks by Fiat CEO Sergio Marchionne. The final details of an agreement remain unclear, another person familiar with Fiat’s proposal said.The clock’s ticking on European Union’s 2012 mandate to reduce CO2 emissions; very little progress has been made… Which explains why the EU’s auto companies are also looking to move the new regs’ deadline forward to 2015. Meanwhile, E.U. member states have agreed to relax the rules governing the amount of money individual states can borrow, so they can address their own credit crisis (i.e. bad paper), hampering new car sales. Over to you, Japan.

The Wall Street Journal says FoMoCo burned through $2.1b dollars of cash in the second quarter, which ended way back in June of this year. Results for the July-August-September period haven’t been released yet. But given what we know about unit sales and sales mix, the cash burn almost certainly has gotten worse. Unlike mere mortals, a public corporation has the option to print-up more shares of stock and trade those for cash. Ford plans to sell $500m worth of freshly-minted common stock (not the special “Class B” shares which only family members get) to raise a bit of the needed cash. The crazy thing: half a billion dollars is a bucket of cold water to throw on the bonfires raging through the $26.6b (as of the 4th of July).  We’ll keep an eye out to see just how much of that went up in smoke over the summer. But wait, isn’t Ford going to be saved by it’s share of the $25b dollar government bailout? Not according to Standard and Poors, which said “that its negative rating on Ford would not be affected by the recent passage of a $25 billion low-interest loan package.” We shall see if the company’s finances are “Built Ford Tough” soon enough.

Though we can’t do anything now to prevent the passage of the $25b industry loan package, there’s still plenty of scope for measuring results and demanding accountability. After all, as Danny Howes of the Detroit News puts it “Implicit in the federal loan package, it seems to me, is a message from Congress and their constituents: Get it right this time because there may not be a next time.” In his latest editorial, Howes qualifies his earlier bailout support with a call on the Detroit to get back to the business of being in business. Recent hybrid and electric hype coming out of Detroit “has the eerie feeling of a cranky heart patient running on a treadmill because he has to, not because he wants to,” reckons Howes. And when there’s a shortage of heart attack medication, such calls to action should be even more closely heeded. An S&P press release published in Automotive News (sub) claims that receiving $25b in low-interest loans has done nothing to boost the credit ratings of Detroit automakers. A full FAQ is published at S&P’s subscriber-only ratingsdirect.com website, but the argument’s broad strokes are that nobody knows how or when Detroit will actually get the federal loans. Until such time as the loans are approved and the checks clear, S&P sees no reason to elevate the credit ratings of domestic automakers, currently standing at (B-/Negative/–) for GM, (B-/Negative/–) for Ford Motor Co., and (CCC+/Negative/–) for Chrysler LLC.

Back when there still was a real estate market, the San Francisco Bay area was one of the hottest. Los Gatos’ auto row included several venerable multi-generation family operations. Last year Swanson Ford gave up the ghost. Last week, Los Gatos Chevrolet hung up its spurs. Now lonely Moore Buick-Pontiac-GMC finds itself the sole survivor, stuck between the carcasses of Swanson on one side and Los Gatos Chevrolet on the other. According to the The San Jose Mercury News (SJMN), “Perhaps a dozen San Jose-area dealerships have closed in the past few years, including Silicon Valley Hummer, Stevens Creek Buick-Pontiac-GMC, Sunnyvale Dodge-Chrysler-Jeep and Sunnyvale Lincoln-Mercury this year. Smythe Volvo closed a location on Capitol Expressway Auto Mall, but remains open on Stevens Creek Boulevard.” Paul Melville of Grant Thornton LLP sums up the nationwide situation: “‘An increasing number of dealers are simply closing their doors because sales have plummeted, credit has dried up, the overall retail environment is increasingly challenging and potential investors are sitting on the sidelines… In addition, the domestic automakers who badly need retail consolidation are not spending much of their scarce capital on the problem because the economy is doing it for them.'” Even so, the dealer networks are not yet shrinking as fast as retail sales are falling. Carmageddon indeed.

While Chrysler plays hardball with its suppliers, Ford is reforming its supplier relations by sharing technology and standardizing components. Automotive News (sub) reports that Ford will share a variety of its intellectual property with minority-owned suppliers in hopes of developing new products and commercial uses for them. Among the first suppliers to receive assistance in the Joint Technology Framework are Dakkota Integrated Systems, Flex-N-Gate, Gonzalez Production Systems, Grupo Antolin Wayne and Prime Wheel. “We need to support our minority- and women-owned suppliers in moving toward a business model that competes on technology, in addition to cost,” said Tony Brown, Ford VP for global purchasing. The program aims to allow those suppliers “to attract the engineering talent and new sources of capital to migrate these technologies to the next level.” Ford is also attempting to standardize European and American products by sharing as many components across markets as possible. The forthcoming US-market Fiesta will share 78 percent of its parts with its European cousin, while the US Focus will share 90 percent of its parts with the Euro model. Unifying product strategies helps Ford not rely on the approved $25b bailout loans, says Brown. “Our product plans are funded,” Brown tells Automotive News (sub). “None of Ford’s product plans hinge on it.”

You can’t kill the $700b federal bailout bill– sorry, “rescue package” with a stick. And now that it’s ballooned from two pages to over 400, the auto industry lobbyists have wet their beak. Automotive News [sub] reports that “House Financial Services Committee Chairman Barney Frank, D-Mass., confirmed this week that under the plan, the Treasury Department would have authority to buy securities backed by automotive loans. Automotive loans are not as troubled as mortgages, but in the current climate investors are unwilling to buy the securities, effectively cutting off the flow of credit, industry lobbyists say.” In other words, Uncle Sam is going to assume responsibility for billion of bucks in bad paper written by domestic automakers and their agents to move the metal, so that the feds can “free up” the credit market and enable automakers to write more bad loans to boost their bottom line. There ought to be a law. Or, in this case, not.

The Associated Press report brings us the stunning news that GM’s employees have loaded up their 401K plans with so much company stock that the cupboards ran dry. Back in January, Financial Weekly published one of the many articles about the risk of loading-up on company stock. “After thousands of employees at now-defunct corporations such as Enron and WorldCom saw their retirement savings wiped out early in this decade, things were going to be different.” In case anyone has been under a rock for the past ten years, you don’t want your salary and your pension and your retirement investments all riding on the fortunes of one company. The big reason GM ran through its authorized number of shares for the 401K plan was the price plunge. GM stock is off 75 percent from its recent highs; it now takes four shares to stock to soak-up the cash which previously would have only bought one share. Between now and sometime in November when GM puts through the paperwork to print more shares, employee contributions will go into other investments. How long will it be before GM employees follow their Enron soul-mates into court over bombed-out 401K plans? Actually, it’s already happened. Workforce Management reported the January 18, 2008 settlement of a class action suit brought against GM in 2005 over the plunging value of employee 401K purchases of GM stock. Will they never learn?

“Support the Emergency Economic Stabilization Package
We need to protect the U.S. economy and American jobs.

• The problems in the credit markets affect everyone, not just investment banks and big global financial institutions.
• Every day trillions of dollars flow in a circle of credit among small banks, credit unions, regional banks, and large firms.
• If a small town bank cannot borrow funds in the overnight interbank market—say to meet its reserve requirements—it could be forced to call in loans or deny new credit, such as car loans, mortgages, and student loans.
• If millions of Americans suddenly cannot get loans for cars, home improvements or new appliances, business that produce these goods and services will be forced to cut back and lay off workers.
• These layoffs would quickly boomerang throughout the whole U.S. economy, leading to ever bigger rounds of layoffs.
We need to protect the life savings of millions of American workers.
• Nearly 66 million Americans have 401k plans with their retirement savings. The most recent Department of Labor data show that these 401k plans have assets of $2.4 trillion. And Americans hold nearly $20 trillion in equities altogether.
• Almost 2/3rd of 401(k) assets are invested in stocks, with hundreds of billions of dollars of IRA assets held in banks and thrifts.
• The gathering financial crisis undermines confidence in the U.S. financial system and in the U.S. economy.
• The delay in passage of a financial rescue package has contributed to the sharp plunge in the stock markets we are seeing both in the U.S. and around the world.
• Yesterday (September 29th) alone, the Dow fell by 777 points, the largest one day drop in history. In this single day more than $1.1 trillion in U.S. equity wealth was wiped out—from 401k plans and investment accounts both large and small. This loss of wealth was half again larger than the proposed rescue package.
• Congressional action is needed to restore confidence to the financial markets, stop the panic selling of stocks, and allow normalcy to return to valuations.
We need to heed the lessons of history.
• One of the most important lessons in economic history, from the Great Depression, is that a banking and liquidity crisis can become a self-fulfilling prophecy.
• When financial institutions large and small do not have confidence that their deals will be honored, they hunker down and reduce their loans. The result is lost sales, cancelled orders, and foregone consumption.
• The economic rot can spread quickly if it is not addressed by policymakers, especially if panic sets in as appears to be the case now.
• Job losses can cumulate quickly. People may forget that during the Great Depression the unemployment rate hit nearly 25%.
• We simply cannot repeat the mistakes of that era, especially now that we know how that story ended.”

And there I was thinking America runs on Dunkin’.

Amidst all the noise about “troubled assets” and “toxic debts,” few commentators have noticed  that the bailout rescue package before Congress (again) includes provisions for the government to buy-up car loans gone bad. The Wall Street Journal, “In August, tight credit caused General Motors to lose sales of roughly 10,000 to 12,000 vehicles, the car maker said. When extrapolated across the entire U.S. industry, that was the equivalent of 40,000 lost sales, or about $1 billion in revenue.” Thus, the fed’s grand plan to pick-up big dollops of the bad paper so that car dealers can get back to the business of putting people into cars and trucks they can’t afford by writing more bad paper. Personally, I think people should only buy the vehicle they can pay cash for, but if the world agreed with me then the automotive market would probably crash and burn. Americans wouldn’t even accept a China-style system, where buyers have to put down 40 percent of a vehicle purchase price in cash. Regardless, if the bailout package passes this week, you can bet The Big 2.8 will be looking to push that money straight into its dealers’ hands.

Sadly this is not a story about how Ford has been doing reasonably well and actually wants to buy off debt with some cash it’s socked away. No, if Ford wants to live to fight for another bailout, it has little choice but to use cash to pay off $1.5b in debt that comes due tomorrow. “We expect them to use cash out of hand to pay those down,” said Mark Oline, a credit analyst at Fitch Ratings Co. in Chicago. “In the current environment we simply expect these sorts of debts to be paid off, not refinanced.” Not that paying off debt with more debt isn’t awesome, and Ford does still have access to an $11.5 billion revolving line of credit which it has yet to tap. But like the guy says, “in the current environment” is the operating term here. A billion bucks’ worth of debt that comes due tomorrow is owed by Ford Credit, which has a relatively high degree of flexibility for refinancing. So while Ford Motor has no choice but to cough up $500m in cash, Ford Credit could potentially refinance without reaching for its revolving credit line. Ford is also planning the sale of about $500m in new stock. According to Bloomberg, that money will be used to buy back bonds maturing before Jan. 1, 2012. Given that GM just had to tap into its own $3.4b revolving credit account, Ford’s decision to mortgage itself to the hilt prior to the credit meltdown now seems like an inspired business move.