The specter of a bankruptcy filing is haunting General Motors Corp.'s stock and bonds.
The evidence can be seen in the derivatives market, where investors can buy insurance against corporate default. Right now, the instruments that convey that insurance signal a 50% probability that GM will file for bankruptcy protection within five years, according to J.P. Morgan Chase & Co.
But should the nation's largest auto maker end up in bankruptcy court anytime soon, it likely won't be due to a cash crunch. Though bedeviled by falling market share, labor woes and high retiree-benefit costs, GM actually has enough money to keep running for quite some time -- maybe even long enough to turn its business around.
"We don't see a cash squeeze at GM over the next year," said Robert Schulz, a credit analyst covering autos at ratings agency Standard & Poor's. His outlook is predicated on the belief that there won't be a prolonged strike by workers at GM's main supplier, Delphi Corp., an assumption shared by most other industry watchers.
GM Vice Chairman and Chief Financial Officer Frederick "Fritz" Henderson said on a conference call after the company's release of first-quarter results yesterday that GM is focused on building a bigger cash pile. That money "is our source for financing our turnaround," he said. GM's stock rallied on the earnings report, which showed double-digit revenue growth and narrowing losses. In 4 p.m. composite trading on the New York Stock Exchange, GM's shares rose 10%, or $2.07, to $22.64, while the company's bonds also strengthened.
How big is GM's bank? At the end of March, the company's automotive operations had $21.6 billion. Of that, $18.8 billion is in cash and securities, while about $2.8 billion is available from an independent employee health-care trust known as "VEBA." The company can use money from this trust to pay health-care costs, bolstering its cash flow in certain periods.
The auto unit's cash pile was boosted in the first quarter when GM sold a stake in Suzuki Motor Corp., and the company has taken other steps to bulk up on cash, including, most prominently, the sale of a 51% interest in its finance arm, General Motors Acceptance Corp., which should bring in $10 billion by the end of 2006. GM also sold a stake in Japanese truck maker Isuzu Motors Ltd. for $300 million, and earlier this year it halved its annual dividend to $1 a share, saving about $565 million annually.
Tally it up, and GM could be on pace to end the year with about $32 billion in the bank -- a big cushion it needs. "Even though we're seeing improvement," Mr. Henderson said, "we're still burning cash."
Last year, the company's automotive operations had a cash outflow of about $4 billion, meaning the business spent more money than it brought in. In the first three months of this year, the automotive operations generated operating cash flow, excluding the effect of contributions from the VEBA trust, of about $800 million. That figure was helped by $2 billion from the Suzuki sale.
Capital spending of $1.3 billion during the first quarter was also low, Mr. Henderson said. The finance chief cautioned that such spending, which includes outlays for plants and machinery, would ramp up "significantly" later in the year and would probably total about $8.7 billion for all of 2006.
Analysts are projecting that GM's automotive division will burn through a total of about $8 billion through 2007, taking into account moves GM likely will make to get its costs under control for the long term. Goldman Sachs estimates GM could spend $2.8 billion this year and next just on offering buyouts to employees at GM and Delphi. Other restructuring and special employment-related costs could result in about $3 billion in additional cash outlays. And GM may be forced to make additional payments to its pension plans as a condition of the GMAC sale, and it may have to put up more cash to help prevent a strike at Delphi.
But its coffers will benefit from money it will receive from GMAC even after the sale of the majority stake in that business.
Bottom line: If there isn't a strike at Delphi, GM's automotive operations likely will see cash decrease by about $4 billion this year and next, according to analysts. The company also has about $1.2 billon in debt maturing by the end of 2007 that it will need to pay off or refinance.
Altogether, these costs could reduce GM's cash to about $26.8 billion by the end of 2007, which still should be enough for GM to continue pursuing its turnaround.
"We are not looking at a near-term liquidity crisis at GM," said Bruce Clark, a credit analyst at Moody's Investors Service. The cash the company has amassed "should cover the burn."
So why are markets so rattled by the possibility that GM could file for bankruptcy protection? A strike at parts supplier Delphi, however unlikely at this point, would lead to production stoppages that could cause losses at GM to spiral. Or GM could face a strike of its own. And GM still has a huge, long-term liability of about $65 billion related to its employee-pension plan and other retiree benefits.
Even if GM doesn't face a cash crisis, it could be forced into a strategic bankruptcy if it decides its business model is flawed and so acts sooner than later to protect its creditors. Over the long run, critics point out, GM still needs to do a better job of making cars that a nation of drivers wants to buy.
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