GM data mask difficult times ahead
By Bernard Simon in Toronto
Published: November 20 2009 09:09 | Last updated: November 20 2009 09:09
General Motors’ revelation this week that it is sitting on a pile of cash and will soon start repaying US and Canadian government loans masks a more sobering message from the Detroit carmaker: its financial condition remains fragile and is set to worsen before it improves.
Data accompanying GM’s third-quarter earnings report make clear that the decision to repay the loans is based less on a turnround in operations than on taxpayers’ generosity and the terms of its bankruptcy-court restructuring, which saw the “new” GM emerge in July.
As Bob Schulz, Standard & Poor’s auto analyst, points out: “The debt repayment is coming from existing cash balances rather than from internally generated cash.”
The carmaker acknowledges that three out of four drivers of its performance – the global vehicle market, costs and cash flow – will be unfavourable in the fourth quarter.
It expects that the expiry of
car-scrappage incentives in the US, Germany and elsewhere will keep a lid on demand for new vehicles for some time. Meanwhile, it is stepping up capital outlays and engineering and advertising spending after going into near-hibernation during the bankruptcy proceedings.
The company sees the fourth variable – its own success in the marketplace – as a positive, based on a batch of well-regarded new models and balanced dealer inventories.
But the chances of much momentum on that front are slim. New vehicle prices in the US are expected to be flat at best, and few outsiders give GM much chance of lifting market share in coming months as it sheds four of its eight brands.
In fact, it was set yesterday to unveil fresh discounts and other incentives to bring down unsold inventories of 2009 models.
The clouds do have some silver linings. The restructuring has shorn GM’s debt from $94.7bn to $17bn, more than half of which is owed to the US, Canadian and German governments.
Erich Merkle, who runs the autoconomy.com website, estimates that GM’s North American output will grow by almost a third next year on the back of the US economic recovery.
Eric Selle, analyst at JPMorgan, advised clients this week to buy the bonds issued by GM before it entered Chapter 11 on the strength of this week’s results, in anticipation of growth internationally and further cost savings.
Under the restructuring terms, those GM bondholders will gain a rising equity stake in the new company if its market value rises above specified thresholds. The US and Canadian governments own 72 per cent of GM, with the rest held by the United Auto Workers union healthcare trust and bondholders.
Fritz Henderson, GM’s chief executive, however, cautioned this week that “we would expect liquidity to decline in a pretty significant way [in coming months]”.
Furthermore, obligations totaling $3.2bn come due early next year to help fund new union healthcare plans in the US and Canada. These healthcare liabilities and a further $9bn in preferred stock will come on to GM’s balance sheet early next year as part the carmaker’s accounting overhaul following its emergence from bankruptcy.
The bulk of the third quarter’s $3.3bn in operating cash flow was due to one-off changes in working capital, relating to inventory financing and the timing of supplier payments at the time of GM’s emergence from bankruptcy protection.
The net cash position of just over $8bn at the end of September, is set to shrink dramatically in the fourth quarter.
GM paid $2.8bn last month to Delphi, its biggest parts supplier, to help finance the latter’s emergence from Chapter 11. Government loan repayments will eat up another $2.5bn.
Further operating losses will exacerbate the cash drain. GM expects global industry sales to fall to an annual rate of 65.4m vehicles in the fourth quarter from 67.8m in the previous three months.
The outlook for 2010 is little better, with GM projecting industry sales at between 62m to 65m. The company could be helped however, by a modest recovery in the US.
Mr Henderson acknowledged on Monday that “we have significant work to do”. Few would disagree.
FT.com / UK - GM data mask difficult times ahead