GM's Cash Drain Continues

Special to The Auto Channel
SeekingAlpha
by:Ockham Research
May 07, 2009

GM Really muscled the creditors to accept a really low payout for the money they were owed. That’s the threat now implied to General Motors credit holders. Do you think those GM creditors will cave making a bankruptcy unnecessary, come to a deal before a declaration of bankruptcy because they’ve seen what happened to Chrysler?” Fox Business Network 5/6/2009

General Motors (GM) reported earnings for the first quarter today that were actually slightly better than analysts had expected, but these days there are much bigger issues at stake than beating the analysts. This quarter saw the company lose $6 billion on a “revenue implosion,” down 47% from a year ago. Buyers were scared off by the prospect of bankruptcyOckham historical valuation GM, further deteriorating buying interesting in this tough spending environment. Even if the company does not announce bankruptcy by the June 1st deadline, the company plans to idle plants this summer (click chart to enlarge).

Most importantly, the company burned through $10.2 billion in just three months. The company cut more than $3 billion in costs in the quarter, but as GM’s CFO said, “We cannot cut costs fast enough to offset that revenue loss.” Buoyed by the federal loans, GM still has about $11.6 billion in liquidity down from more than $14 billion three months ago.

Clearly, the company is as close to a breaking point as ever before. They will need another substantial government loan, asset sales, major concessions from bondholders/unions, and of course they may need all of those actions in order to keep the company going for the long term. As we have written previously (GM Bondholders: No Good Answer), the bondholders are unlikely to accept the massive haircut that management is demanding. They might as well just take GM into bankruptcy court and see how much they can get from a sale of assets. I could be wrong about this, but other than a patriotic duty there seems to be little incentive to them in the current offer, and a counter offer will need to be put on the table soon if it has any chance. After all the government’s June 1 deadline is quickly approaching. If GM is able to avoid the same fate as Chrysler it will be by the skin of its teeth, as so many loose ends need to be tied up in such a short amount of time. At least we wont have long to wait to learn the resolution.