General Motors Death Watch 181: Bankruptcy
TTAC’s Deep Throat and I have been talking about GM’s decline and fall for well over two years. My man’s mantra: “follow the cash burn.” And so we have, through foreign misadventures, asset fire sales, union payoffs, supplier bailouts and more. We’ve watched GM CEO Rick Wagoner mortgage the American automaker’s future to conflate the company’s bottom line— to little avail. Throughout this firestorm, we’ve wondered how the automotive and financial press could miss the simple fact that GM’s been taking in less than it spends for a long, long time. And now, suddenly, they’ve noticed. And now the end is near. Here’s how DT sees it going down…
In February 2006, The General halved its dividend to .25 a share. At the time, GM claimed it made the move “to support its ongoing turnaround plan, particularly in its North American business, to reduce costs and business risks, and to further enhance its financial flexibility.” Two years later, GM’s spending $3b a year on interest payments, burning through a reported $1b per month and contemplating borrowing $10b to bolster its liquidity. In short, the dividend is doomed.
Today's GM’s stock price: $13.79. According to DT, when the dividend disappears, the share price will fall through the floor. The elimination of GM’s dividend will have an enormous psychological impact— none of it good. Talk of a GM bankruptcy will erupt once again, driving institutional investors away from GM stock and scaring-off potential customers.
Meanwhile, ResCap, the mortgage arm of GMAC Financial, is headed for bankruptcy. GM will not have enough financial muscle (i.e. money) to rescue the lender. Co-owners Cerberus have already declared their refusal to throw good money after bad. What with all the bad news– June sales are going to be nothing less than horrific– the banks will refuse lend GM cash within their existing credit facilities. There won’t even be ten-foot pole marks on additional large-scale loan applications.
DT surmises that when ResCap goes Tango Uniform, GMAC will follow. Without GMAC as a lender of choice for GM dealerships, the automaker’s stores will find it nearly impossible to offer accessible, low-interest loans. GM’s sales will spiral even lower, even faster. And then…
DT reckons GM will file for bankruptcy protections well before it runs out of cash in North America. When I pressed him on a time line, he estimated it could be within the next three months if sales don’t recover from June. GM’s highly-touted, Hail Mary overseas operations won’t be included in the Chapter 11. Like Delphi, the filing will only cover U.S. ops (GM corporate and GMNA).
The day GM files for Chapter 11, they’ll unleash an extensive advertising and PR assault. The huge (and hugely expensive) campaign will assure customers, dealers and suppliers that the automaker’s business will continue. The offensive (in all senses of the word) will blame GM’s collapse—sorry, “restructuring” on rising gas prices, the general economy malaise, imports, etc. Customers will thrill to the revelation that all GM warranties will still be in force on existing and new cars.
DT says GM will immediately seek– and receive– Debtor-in-Possession (DIP) financing. How many billions they’ll Hoover-up to keep the lights on is anybody’s guess. Congressional hearings? Of course. Federal loan guarantees? You betcha. Strings attached? Plenty.
After six to nine months, GM as we know it will be dead. Under new leadership (one can only hope), the company will carry-out the brand restructuring that was due even before GM went nuts and bought Saab and HUMMER. Buick, Pontiac, Saab (in North America), Saturn and GMC will all be axed. DT has no doubts about what will happen on the sharp end: “dealers get fucked without recourse.” Only Chevrolet and Cadillac will remain in business.
Meanwhile, despite their political influence, the United Auto Workers will not be happy; the Mother of All Health Care VEBAs will not be funded. Period. The union will have to make do with what they have. DT figures the rest of the OPEB (Other Post-Employment Benefits) also face a grim, under-funded future.
DT and I have discussed GM’s post-C11 prospects at length. We both agree that bankruptcy will not stop General Motors from selling plenty of cars. Everything sells at a price, and the deals will be nothing less than astounding. But bankruptcy will definitely cut into GM’s volume. That’s the multi-billion dollar question: how much will Chapter 11 hurt GM’s sales from a “normalized” level?
Make no mistake: GM’s bankruptcy is going to hurt a LOT of people. But not, DT says, one smart cookie: Kirk Kerkorian. Captain Kirk will lend Ford the money it needs to stay solvent. FoMoCo’s stock price will soar on news of a GM C11. To the victor belongs the spoils. The rest is, as always, collateral damage.
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The propaganda machine of magazines praising new and past GM models is sad. Their articles and tests do influence folks to a degree, but it does a disservice to GM. Praising the Malibu is like telling your kid who got an F on their report card that “F“ stands for “Fantastic”. I respect the opinion of others who think GM will go bankrupt. However, if it does happen, GM needs to start from scratch. They need to take the route of Hyundai or Kia. Build reliable no frills transportation machines, and when that is perfected, then bring on the performance, options, and uniqueness. Right now, reliable transportation doesn’t exist with GM. What good are the heated seats, retractable tops, and seven welds on a gusset plate when your car is back at the dealership for transaxle warranty work?
GM...PULL THE PLUG, Reset, PLUG BACK IN Without the THREE U.S. automakers combining into one there is no rationality to bailing out GM. GM’s cash burn is triple the street estimate and has lost all control over its sales, its product development and its future. The executives and the unions have the company hostage to government capital infusion. Bankruptcy is a viable answer that can push off creditors and force unions and management to make concessions that are impossible unless a loaded gun is at their head. There is too much capacity, too many models, too many plants, too many employees producing products that are more easily produced by others. The VW bug was the first indication that the Big Three did not have a clue to the needs and long-term preferences of the U.S. consumer. And today we have a glut of SUV’s that will ultimately have to be sold at a first-ever half-price sale. GM has already built them, they have already paid for them and no one wants them. You need cash, blow them out the door ½ price or less and they are out of inventory and cash hits the balance sheet. But to infuse GM with cash to keep it afloat without bankruptcy is no answer because next in line will be Ford and Chrysler. These three should be forced to combine and re-form to use their talents and capacity to building something we all need and that is energy independence. There is one industry that has a payback that cannot be overlooked as a place to re-train and invest and that is in renewable energy. Train those people, insist that the manufacturing capacity of GM be converted to energy and produce, once and for all, a source of energy that once in place CAN NEVER GO UP IN PRICE. In World War II Ford built a massive number of B-24’s in their new Willow Run plant in Ypsilanti. That change in production and product proved that it can be done and Ford did a spectacular job producing that airplane to the considerable consternation to the Nazi war machine. Fast forward to 2008 and our enemy is our own waste and inefficiency; energy independence is crucial to our national safety and we can actually budget part of our national defense budget to this end. I am not against giving money to GM...but I am against giving them money to build products that have no measurable or important upside to our economy long-term. I am against giving money to GM with Ford looking like that doggie in the window. Force them into solar, wind, wave and nuclear. Support them in their endeavor to re-tool and you got my money. Absent that, you will not get me to suggest giving them, their workers or their bloated retirees belly-aching about their co-pay when millions have no health care a single dime. The side benefits are obvious: our defense structure is enhanced because we no longer have to depend on a cartel of Bedouins in the Middle-East to determine for us how much oil we are going to use and our environment actually can become healthy in L.A. vs. choking to death sitting in traffic on the five. We put a pin in our energy costs once in for all and bankrupt our dear friends in the middle east forcing them to drive Chevy Cobalts and trade in their Bentleys. Here is what we said about the Chrysler/GM merger talk= “Two drunks walking down the street holding each other up... until they hit the curb, then they both fall down” Axxel Knutson 11.18.2008