GM, Ford `On the Verge of Bankruptcy,' Altman Says (Update1)
July 22 (Bloomberg) -- General Motors Corp. and Ford Motor Co., the
two biggest U.S. automakers, have about a 46 percent chance of default
within five years, according to Edward Altman, a finance professor at
New York University's Stern School of Business.
``Both are in very serious shape and the markets reflect that,'' Altman,
the creator of the Z-score mathematical formula that measures bankruptcy
risk, said in an interview with Bloomberg Television. The model shows
that these companies are ``on the verge of bankruptcy,'' he said.
The Z-scores for GM and Ford give both a bond rating equivalent to a CCC
ranking, though GM is in slightly worse condition than Ford, Altman
said. GM reported a $38.7 billion loss in 2007, the biggest in its
100-year history, and hasn't posted a profit since 2004. The scores are
based on the companies' finances at the end of the first quarter.
Moody's Investors Service said July 15 it may cut GM's Caa1 senior
unsecured debt rating because the Detroit-based automaker's plan to
raise at least $15 billion by suspending its dividend, cutting
management payroll by 20 percent and selling assets may not be enough to
offset losses. Standard & Poor's also said in June it may lower GM's B
rating. Altman said the plan to raise $15 billion may improve GM's outlook.
Ford, based in Dearborn, Michigan, is rated Caa1 by Moody's and B by
S&P, which said in June that Ford's rating may also be cut.
Ability to Refinance
``The thing that triggers a default in almost all cases is running out
of cash and not being able to refinance,'' Altman said in an interview
prior to his television appearance. ``You're not going to go bankrupt as
long as you can refinance short-term liabilities. You will go bankrupt
if you can't.''
GM Chief Executive Officer Rick Wagoner said in an interview July 15
that the company has the ability to raise cash, and he called bankruptcy
``a bad idea.'' Ford has said it had access to $40.6 billion in funds as
of March 31, including credit lines.
GM's $3 billion of 8.375 percent bonds due in 2033 fell 1 cent to 57
cents on the dollar as of 1:56 p.m. today in New York, according to
Trace, the bond-price reporting system of the Financial Industry
Regulatory Authority. The debt yields 15 percent, or 1,033 basis points
more than similar-maturity Treasuries.
Bonds that trade at a spread of 1,000 basis points or more to Treasuries
are considered distressed, indicating investors are concerned that the
company will default. A basis point is 0.01 percentage point.
``I would not put money with GM right now because the downside is so
great relative to the upside, relative to the yield,'' said Altman,
speaking in New York. ``Your downside is probably 60 percent on the
debt. The risk reward ratio is pretty poor.''