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 While General Motors Corp. and the rest of the industry try to focus on sales at this week's Detroit Auto Show, the main topic on most minds is whether GM and crosstown rival Chrysler LLC can get their houses in order and not be forced to surrender federal bailout funds granted late last year. And as a new report shows, the companies have a challenge ahead of them.
GM as part of the bailout was required by the end of March to, among other things, show a positive net-present value. Breakingviews.com on Monday crunched the numbers to show how difficult that will be for the automaker to do.
By the site's estimates, even if GM swaps two-thirds of its debt for equity, the company would still have $18 billion in debt remaining on top of the $13.4 billion in loans it has received from the U.S. government. Add in $10 billion pledged to the United Auto Workers to fund healthcare benefits, $8 billion for nonunion health commitments and $10 billion in unfunded pension obligations, and that is about $60 billion in total liabilities. On the other side of the ledger, GM has the $15 billion in cash from the government, perhaps $5 billion for its stake in financier GMAC LLC and $5 billion from its stakes in foreign partners. Even if those estimates are correct (the GMAC stake in particular could be inflated), the core auto business would have to be worth $35 billion for the company to have a positive value. It seems it will take all sorts of optimism and creative accounting for GM to get to that $35 billion number, considering as Breakingviews does that even if GM earns $4 billion in operating earnings before tax (very optimistic) the company would have to assign a double-digit multiple on after-tax earnings to its operation to value it near the target. So if this back of the envelope calculation is correct, what saves GM from a spring bankruptcy filing? Creative accounting will surely provide part of the answer. But the better answer is probably a more simple one: The new administration coming to Washington next week does not want to see General Motors in Chapter 11, and that new administration will have the power to change the targets GM has to hit. Here's betting that whatever progress GM has made by the end of March will be enough to get it off with only a stern warning. - Lou Whiteman See Breakingviews research See Detroit Breakdown for complete coverage of the auto industry's restructuring CategoriesComments Deal Video
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Bailout money is not going to save the day. They are nothing but patches to a bigger problem.
The small business owners are going to be hurt more than anyone. Not the car industry.
Sincerely,
Ilya Bodner
Small Business Owner
Initial Underwriting Group