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
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