General Motors (GM): "No Panic" About Bankruptcy, But There Should Be

General Motors (GM): "No Panic" About Bankruptcy, But There Should Be

General Motors (GM) has ridiculed talk of bankruptcy. Specifically, it has asserted that, first, it has enough money to last through the end of the year, and, second, that after its latest reorganization plan is complete, it will have enough to last through the end of 2009.

This is not as reassuring as the company seems to believes. The end of

2009 is only eighteen months away. The company's business, moreover, continues to get worse at a shocking rate. If GM hasn't made huge progress toward turning cash-flow positive again in the next 6-12 months, raising capital to last beyond the end of next year will get increasingly difficult (and expensive).

The company could presumably sell or spin off its international division, but this would mean parting with a crown jewel. Given the rate at which the European economy is deteriorating, moreover, the international division--now barely profitable--could soon plunge into the red. GM's North American business generated $1 billion of operating profit last year and lost $3.6 billion this year, so performance can go south in a hurry.

GM's $21 billion of cash and marketable securities, moreover, is not as impressive as it sounds. The company's cash balance has shrunk by $3 billion in each of the past two quarters, but short-term borrowings and payables have also increased, especially as a percentage of revenue. Short-term debt is up $2 billion from the start of the year and payables are up another $500 million (on a smaller revenue base). Assuming payables and short-term credit soon max out--a reasonable assumption, given the decline of the business--cash burn in future quarters is likely to accelerate.

If nothing changes, GM has enough cash on hand to last 7 quarters: $21 billion divided by $3 billion a quarter. The company's North American revenue dropped a mind-blowing 33% year over year in Q2, however, and the way the economy is heading, this drop could even get worse. If Europe follows the US into the tank, GM Europe will start burning cash instead of generating it, that $3 billion a quarter could rapidly swell.

GM says it has access to another $5 billion on committed credit lines, which will help. Possession is nine-tenths of the law, however, and it wouldn't be shocking to see the banks who agreed to this argue "material adverse change" or some other excuse that would tie up the funds just long enough for it to be too late.

GM's CFO Ray Young told the New York Times that he does "not see any panic here."

Not seeing panic is good: Employee morale would not be helped by seeing the company's senior team wander around the halls in a cold sweat. Feeling panic is another matter, and at this point, it's probably an appropriate response.