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.