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Friday, November 07, 2008 1:48 PM


GM's Liquidity Deteriorates Rapidly


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Inquiring minds are looking at GM's Cash and Liquidity Position and things look bleak. At the present burn rate GM will not survive 2009. From GM's Third Quarter 2008 Results.

Cash and Liquidity

Cash, marketable securities, and readily-available assets of the Voluntary Employees' Beneficiary Association (VEBA) trust totaled $16.2 billion on September 30, 2008, down from $21.0 billion on June 30, 2008.

My Comment: GM burnt through $4.8 billion in the quarter. At that rate it will be out of cash by the end of 2009.
The change in liquidity reflects negative adjusted operating cash flow of $6.9 billion in the third quarter 2008, driven by the industry-wide slowdown in vehicle demand and compounding credit crisis, especially in North America and Europe. During the quarter, GM drew the remaining $3.5 billion of its secured revolving credit facility and made $1.2 billion in payments to Delphi as required by agreements between the companies as part of Delphi's bankruptcy proceedings.
My Comment: The only reason GM's cash position is not worse is that it was able to tap a revolving credit line. That credit line has dried up.
GM expects adjusted operating cash flow in the fourth quarter to be much improved versus the third quarter, and more consistent with the first half of the year. Improvements in fourth quarter cash flow are largely driven by anticipated improvements in working capital in North America relating to sales allowances, and lower fourth quarter finished vehicle inventory in Europe.
My Comment: What GM is saying is "We will continue to suck badly, but at a pace that is not as bad as last quarter." Calling this an improvement is quite a bit of a stretch when the fact remains that GM does not have enough cash to last a year.
In response to deteriorating market conditions, GM announced today that in addition to the $15 billion in liquidity initiatives it outlined in July 2008, it has identified $5 billion of incremental liquidity actions. Cumulatively, GM has announced actions aimed at improving liquidity by $20 billion through 2009. To date, $10 billion in internal operating actions have either already been completed or are on track for full execution by the end of 2009.

Even if GM implements the planned operating actions that are substantially within its control, GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.
My Comment: GM expects to raise $20 billion in liquidity and still run out of sufficient cash to run the business. Who in their right mind would want to lend GM money? At what interest rate?
Looking into the first two quarters of 2009, even with its planned actions, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve, it receives substantial proceeds from asset sales, takes more aggressive working capital initiatives, gains access to capital markets and other private sources of funding, receives government funding under one or more current or future programs, or some combination of the foregoing.
My Comment: It's time for GM management to admit "Bankruptcy is an option."
The success of GM's plans necessarily depends on other factors, including global economic conditions and the level of automotive sales, particularly in the United States and Western Europe.
My Comment: Success is impossible for GM. It's only hope is for the government (taxpayers) to bail them out. It's time to stop throwing good money after and let GM slide into oblivion.

GMAC "Smart Notes" Headed For Money Heaven

Unless the government steps in, approximately $15 Billion in GMAC "Smart Notes" are about to go up in smoke.
GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills.

GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC’s survival, and SmartNotes due in July 2020 have lost about two-thirds of their value.

“An investment like this is totally unsuitable for the retail investor,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. “You’re selling it to the widows and orphans who think of GMAC as being this strong, long-standing corporation when the reality is far from that.”

Of GMAC’s $64 billion in debt outstanding at the end of June, about $15 billion was in SmartNotes. They rank equal to senior unsecured debt, which recovers an average of about 40 cents on the dollar in bankruptcy cases, according to Mariarosa Verde, an analyst at Fitch Ratings in New York.

GMAC and LaSalle said in statements from 1998 through 2003 that the notes were intended for individual investors. Patrick Kelly, a LaSalle managing director, described the buyers in a 2003 interview as “mom-and-pop investors.”
Ford Has $2.98 Billion Operating Loss

Bloomberg is reporting Ford Has $2.98 Billion Operating Loss as Sales Plunge.
Ford Motor Co., with U.S. sales shredded by the worst financial crisis since the Great Depression, posted a third-quarter operating loss of $2.98 billion and said it used up $7.7 billion in cash.

The per-share operating loss of $1.31 was wider than the 93-cent average of 10 analyst estimates compiled by Bloomberg. Ford said it would trim more salaried jobs by January, deepen its fourth-quarter production cuts and shrink capital spending by as much as 17 percent.

Revenue plunged 22 percent to $32.1 billion, forcing Ford to triple its consumption of cash compared with the second quarter. Cash, cash equivalents and marketable securities for Ford's automotive business plummeted 29 percent to $18.9 billion on Sept. 30, the Dearborn, Michigan-based company said today.

"Cash burn is the No. 1 issue," Rebecca Lindland, an IHS Global Insight Inc. analyst, said in a Bloomberg Television interview. "We associate cash burn with General Motors. It has not always been a problem with Ford. That is potentially a new problem."

Ford expects to use up less cash in this quarter than it did in the third quarter, Chief Executive Officer Alan Mulally said on a conference call, without providing a figure.
Ford Tries Same Gambit As GM

Note that Ford, like GM is stating "We will continue to suck badly, but at a pace that is not as bad as last quarter."

Unemployment And Consumer Psychology Are Key Factors

Earlier today bleak economic reports came in: Jobs Contract 10th Straight Month;Unemployment Soars To 6.5%

By the end of the year, unemployment will likely be close to or even above 7%. Expect to see another two points minimum tacked on in 2009. In other words look for unemployment to hit 9% minimum and keep rising into 2010.

If the definition of an economic depression is 10% unemployment, we are very likely to get there. Note that alternative measures of unemployment hit 11.8% today and that is an official government number (see above link). How bad is it really?

Here's a hint for GM and Ford. Unemployed people do not buy cars. Furthermore consumer sentiment is such that even people who can afford to buy cars won't. Barring government intervention, Ford and GM are doomed to bankruptcy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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