General Motors Death Watch 139: Money Talks

Robert Farago
by Robert Farago

On Tuesday, the junk bond market sneezed and General Motors caught a cold. Less poetically, the money men behind the buyout of GM’s Allison transmission unit postponed a junk bond offering designed to pay for same. According to market sources, when the “spread” (the extra yield investors demand to compensate for their risk) widened by about 100 basis points, Merrill Lynch, Citigroup and Lehman Brothers pulled the plug. GM spokeswoman Renee Rashid-Merem said the company wasn’t worried about the sale: “The buyout remains on track.” Maybe so, but GM can’t afford this kind of setback. Literally.

GM is now deep into contract negotiations with the United Auto Workers (UAW). By all accounts, The General’s generals need some kind of “game changing” deal with the UAW. In other words, GM must take CEO Rick Wagoner’s well-established “pay off to f-off” union template to the next level. If, for example, GM wants to dump their health care liabilities into a UAW-run VEBA, it will require tens of billions its U.S. operations are still not generating.

It’s true: the chips are down. Without delving into the finer points of the fire raging through GM’s cash hoard, the automaker needs the $5.6b check from the Allison sale to finance its “turnaround.” Ipso facto. Whether or not The General’s advisors manage to off-load $3.1b in junk bonds to finance the Allison sale in a timely fashion, the fact that it’s happening at all tells us the company’s corporate masters are still mortgaging the farm to bet the farm on the farm. And the crops are still failing.

Confirmation came [again] on Monday, when we learned GM’s set to cut production of the vehicle Rick Wagoner hailed at launch as “the most important part of GM's strategy to turn our fortunes around.” GM’s Pontiac Production Center will soon be building 17 percent fewer Chevy Silverados.

More specifically, GM is reducing Pontiac’s pickup production by 3060 vehicles per month or 36,720 per year. If you [conservatively] figure GM clears $2k per truck, the move evaporates $73.4m in profit. And it still might not be enough; Silverado sales dipped 23.5 percent in June. Another month like that…

Is exactly what the financial whiz kids over at Barron’s are predicting. If so, by the time GM unveils its UAW window dressing in September, Wall Street’s confidence in the automaker’s prospects may be so low that another “historic union giveback” won’t make no never mind to the money men. The cost of GM’s borrowing, which is already onerous to the point of near-usury, will escalate even further, even faster. For a company already downing in a sea of debt, that’s not good.

What’s worse, GM’s faces a more general malaise in the leveraged loan and high-yield markets. Ironically enough (given GMAC’s role in the debacle), the sub-prime mortgage crisis has taken the sheen right off the sector. Cerberus is reportedly having problems financing its Chrysler takeover at the desired price. Despite Ford’s “surprise” results (attributable to asset sales and foreign ops), investor confidence in The Big 2.8 is fading. Same result: the cost of borrowing rises.

Brad Rubin, senior auto sector trading specialist for BNP Paribas, recently stated that “Investors know both Ford Motor Co. and GM are going to have to tap the debt markets at some point, and unfortunately it's at much wider levels than what they've done before.”

GM already rolls over tens of billions of dollars in debt each year. As Slate’s Daniel Gross pointed out way back in ’05, if GM borrows $30b and the rate it pays for new debt rises 1 percent, the company has to stump-up $300m in additional interest costs. “And since interest has to be paid first, higher interest costs mean less money for important things like executive compensation, investment in new plants, marketing, and developing hybrid engines.”

Fast forward three years and you can add financing union givebacks to the list. And update GM’s debt rating to Fitch Ratings’ “negative," despite dodging the Delphi bullet (by paying off the unions, ‘natch). While the media talks about GM's union-related health care burden, pegging the cost at $1800 per car, if The General returns to the Wall Street well in a big way, its vehicles could soon be shouldering half as much again in interest payments.

GM’s debt is a ticking time bomb; the fuse is well and truly lit. In terms of ridding itself of the UXB, nothing much has changed: GM can only eliminate its gigantic debt burden by selling hundreds of thousands of high margin vehicles in the United States.

Yes, well, in response to fading market share and continued over-production, GM has just amped-up its financial incentives on languishing metal (including leftover 2006 models). Meanwhile, Toyota’s going great guns. Its new entry into the full-sized pickup truck market has triggered the predicted incentives war in GM's most profitable segment, in a declining market.

As a TTAC commentator recently pointed-out, GM is now like communist Russia, with Toyota as America spending them into oblivion. For those who believe that GM can emerge from this crisis– or Chapter 11– fitter, better and stronger, the parallel is instructive.

Robert Farago
Robert Farago

More by Robert Farago

Join the conversation
2 of 58 comments
  • Mikey Mikey on Jul 28, 2007

    Redbarchetta Where did Iget my devine knowledge you ask? Well I wouldn't call it devine knowlege, anymore than I would refer to a company employing 284000 Americans, as a cancer that should be gone.Your post July 27 10:24. Devine knowledge? No, maybe educated guess would be more accurate

  • Redbarchetta Redbarchetta on Jul 30, 2007
    mikey: I feel a little bad for all the employees that are going to lose their jobs when GM finally goes bye-bye(not the millionares at the top though, fry them). But then I think about the millions of American's (me included) that have been screwed repeatedly by GM(and Ford and Chrysler). I cannot and will not excuse their past & present(future) conduct just because some people might lose their job. I guess Enron should still be in business because they employeed thousands of people even thought they stole billions from the rest of us. Just look at previous customers posts to see just why they are a cancer. I'm sure the government employees working in Communist Russia didn't think their employer was a cancer on their country, but it was. Evil empires don't deserve to be in business!
  • Zerofoo “Can the sedan be saved?” Sure - just lift it a bit, add a mild all wheel drive system, and make the trunk a lift back. I don’t know a single middle-aged woman who doesn’t drive a CUV. Precisely none of them want to go back to a sedan. The sedan may not be die completely, but sedans will not replace CUV/SUVs any time in the foreseeable future.
  • Jeff Stevie Ray Vaughn Flood Down In Texas and almost any song from him.
  • Kjhkjlhkjhkljh kljhjkhjklhkjh bectha they don't get the key...
  • Aja8888 That's such a horrible car and ad, I can't even post about it.
  • Jeff I don't believe sedans will completely disappear but manufacturers will offer less sedans. The trend to make sedans 4 door coupes with slopping roof lines, smaller mail slot trunks, rubber band tires, lower slung to where they bottom out over a speed bump, having to crawl down to get into them, having to bend your head in the rear in order not to hit your head on the rear glass, and less head and leg room. I blame coupe like sedans not just on aerodynamics but on car journalists that judge all cars on being sports cars and the ability to canyon carve. Its form over function resulting in more suv, cuv, and pickup truck sales. This would be a good time for Lincoln, Cadillac, and Buick to offer a full size 4 door sedan with a decent sized interior, good sized trunk, comfortable ride, with a V-8, and rear wheel drive. Could build a Lincoln Continental on a stretched Mustang platform and GM could stretch the former Camaro platform to make a Cadillac Deville and Buick Roadmaster or Electra. These would not sell in the number that F-150s or Silverados would but they could sell enough to be profitable. Don't make them canyon carvers just make them comfortable and smooth riding with decent handling. Car journalists might not like these but this is what many miss from the past and they would sell. Many not all car journalists are out of touch with what most consumers want in a vehicle.