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Sunday, August 26, 2012 9:55 AM

GM Seeks Bigger Credit Line To Shrink Pension Obligations; Déjà Vu Pension Woes

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Going into debt to fund pensions seems like a ridiculous thing to do, especially for a company that had a chance to shed more of those pension obligations in bankruptcy.

Please consider the Wall Street Journal story GM Wants to Up Credit Line

General Motors Co. is in preliminary talks with banks to potentially double its $5 billion line of credit as the auto maker looks to strengthen its balance sheet and shrink pension obligations, according to people with knowledge of the discussions.

The world's largest auto maker by sales is in no danger of running short on cash. The Detroit company has very little debt and held about $33 billion in available cash at June 30. Analysts believe it needs roughly $20 billion to operate comfortably. It currently has an available line of credit of $5 billion.

But GM could have hefty cash needs ahead. Its European operations are racking up major losses, it is increasing capital spending on new vehicles, and it may want to repurchase shares held by the U.S. Treasury. GM also wants to reduce its U.S. pension obligations. Pensions for hourly, union workers and retirees are underfunded by about $10 billion and have been a major concern for investors.

GM is spending around $4 billion to shift responsibility of its $26 billion salaried retiree pension program to Prudential Financial Inc. PRU +1.52% in a deal set to close by year-end. A bigger drag on the company is the $71 billion in pension obligations it has to union-represented hourly workers and retirees. That account is underfunded by $10 billion, according to public filings.
GM's Pension Liabilities

On June 1, 2012 the Chicago Tribune reported GM to cut about one-fourth of U.S. pension liability
General Motors Co will cut nearly a quarter of its U.S. pension obligation by transferring the management of its pension plans for 118,000 white-collar retirees to a third party and offering lump-sum buyouts.

The two moves unveiled on Friday will cut $26 billion from the automaker's massive U.S. pension liability of nearly $109 billion. GM's pension overhang is a top concern for investors. It was one of a handful of issues left untouched during GM's U.S.-financed bankruptcy restructuring three years ago.


A growing concern for decades as U.S. automakers lost market share to foreign-based automakers in their home country, pension costs became an albatross for the U.S. industry with the sector's downturn five years ago.
GM's Balance Sheet

Inquiring minds investigating GM's Balance sheet will notice about $32 billion in cash, $11 billion in securities, and another $11 billion or so in accounts receivable.

However, GM has $10 billion in long-term debt and another $43 billion in other liabilities. Current liabilities are roughly $56 billion. Total Liabilities are $110 billion of which at least $31 billion are pension and retirement benefits.

Assets include a very questionable $28 billion in goodwill, and a questionable $25 billion in property.

The balance sheet above does not seem to match the Tribune's calculation of  $83 billion in pension liabilities (109-26). The $109 billion figure does match total liabilities.

Déjà Vu Pension Woes

Borrowing $5 billion to shore up its pension plan certainly would have worked well in 2009. However, GM wants to do it now, a foolish undertaking in my opinion.

Pension obligations helped sink GM the first time, and it may happen again, especially if GM borrows money to throw at the stock market. If stocks decline and auto sales decline as well, GM will be in serious trouble once again.

Mike "Mish" Shedlock
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