GM, Ford, Chrysler Face Bankruptcy Risk on Crisis, S&P Says

Oct. 10 (Bloomberg) — General Motors Corp., Ford Motor Co. and Chrysler LLC, the three biggest U.S. automakers, may be forced into bankruptcy as the global credit freeze damps U.S. sales, Standard & Poor’s analyst Robert Schulz said.

“Macro factors could overwhelm them at some point” even as GM, Ford and Chrysler vow to stick with their turnaround plans, Schulz, S&P’s lead automotive credit analyst, said today in a Bloomberg Television interview in New York. The companies said they have no plans to seek bankruptcy protection.

His assessment underscored the pressure on the industry as the worsening credit crisis makes it harder for buyers to get loans and dealers to finance their operations. S&P said yesterday it may further trim credit ratings for GM and Ford on forecasts for 2009 auto demand to fall to its lowest since 1992.

With all three companies working to boost cash, any bankruptcy filing would be a last resort, not a “strategic” decision, Schulz said.

“We don’t see that as something they would choose,” he said. Schulz said the “trigger” for a forced restructuring under bankruptcy protection would be based on the automakers’ ability to preserve liquidity as sales decline. Industrywide U.S. sales slid 27 percent last month, the most in 17 years.

`Not an Option’

“Bankruptcy is not an option GM is considering,” spokeswoman Renee Rashid-Merem said in an interview today, reiterating comments made yesterday. “It’s not in the interests of our employees, stockholders, suppliers or customers.”

GM rose 13 cents, or 2.7 percent, to $4.89 at 4:02 p.m. in New York Stock Exchange composite trading, its first advance since Sept. 30. Ford dropped 9 cents, or 4.3 percent, to $1.99, its lowest since Oct. 5, 1982. Chrysler is closely held.

Operating-cash needs at GM, Ford and Chrysler are “substantial, so if it looked like they were going to be pushing toward that number because of these operating losses and cash usage, that’s sort of the point where they’d have to consider” bankruptcy, Schulz said.

S&P said yesterday that its debt ratings for GM and Ford, already at six steps below investment grade at B-, may be lowered again because the automakers face a “serious challenge” in 2009.

Barclays Capital reduced its target stock price for GM to $4 today, with analyst Brian Johnson in Chicago citing dwindling global auto demand.

GM’s Cash Needs

“With auto sales stalled in the U.S. and beginning to contract in the rest of the world, we believe GM’s cash needs are increasing,” Johnson wrote in a note. “Moreover, the downside risk of greater decline in worldwide auto sales driving greater cash needs is increasing.”

GM and Dearborn, Michigan-based Ford lost a combined $24.1 billion last quarter. GM last posted an annual profit in 2004, while Ford hasn’t had a full-year profit since 2005.

Rashid-Merem, the GM spokeswoman, said the automaker still expects to add $15 billion in liquidity by the end of next year, including speeding up plans to cut $10 billion in costs.

“GM’s turnaround may be achieved outside bankruptcy with its $15 billion savings program and potential electric car,” Martin J. Bienenstock, chairman of business solutions for New York-based law firm Dewey & LeBoeuf LLP, said today.

The benefits of a bankruptcy “could include converting substantial unsecured bond debt to stock and rejecting and renegotiating dealer agreements to foster a more efficient brand mix,” Bienenstock said in an e-mail. Bienenstock has advised GM and was chief lawyer for Enron Corp., which in 2001 filed what was then the largest bankruptcy in U.S. history.

Ford has a cash cushion, spokesman Mark Truby said yesterday in response to S&P’s report raising the prospect of another ratings cut.

Ford’s Borrowing

“We were fortunate to go to the markets at the right time,” Truby said, referring to $23.4 billion borrowed in late 2006 to help pay for shutting plants and cutting jobs while developing new models.

He said Ford is reviewing its liquidity and will give an update when third-quarter financial results are released. Ford hasn’t given a date for the release, which the company typically issues later in October.

Chrysler has no plans to declare bankruptcy, spokeswoman Shawn Morgan said today in an interview.

The automakers won Congress’s approval last month for funding $25 billion in low-interest loans to help develop more fuel-efficient autos. The funds will be spread chiefly among Ford, GM and Auburn Hills, Michigan-based Chrysler, though other automakers, such as Volkswagen AG, have said they will seek a portion.

Regulators are writing the rules for that borrowing even as auto-market conditions worsen. Industry researcher J.D. Power & Associates estimated yesterday that U.S. industrywide sales will fall to 13.6 million this year and 13.2 million in 2009. Last year’s total was 16.1 million.

Industrywide Outlook

Industrywide sales of 13 million autos next year would mean shrinkage in the overall U.S. vehicle fleet, said Erich Merkle, an analyst for consulting firm Crowe Horwath LLP in Oak Brook, Illinois.

“We are going to find people where they may have had three cars and now have two, and two cars now have one, and a lot of that is just because of the economic environment,” Merkle said. “They may not have the ability to buy a new car and even if they do, they may not be able to get financing for that car.”

Global demand in 2009 may be even worse, with “an outright collapse” now possible, according to J.D. Power, which is based in Westlake Village, California.

Capital One

Capital One Financial Corp., the lender that raised $200 million in September to cover future losses, said today it will end financing of auto dealers’ inventories in the states of New Jersey and New York later this month.

GM also may announce further production cuts or plant closures as early as next week, the Associated Press reported today. GM spokesman Tony Sapienza declined to comment on the report in an interview. In July, GM said it was considering further cuts to its metal stamping and engine plants because of reduced U.S. sales.

GM’s 8.375 percent note due July 2033 fell 6 cents to 18.5 cents on the dollar today, yielding 45 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Ford’s 7.45 percent note due July 2031 declined 10 cents to 24 cents on the dollar, yielding 31.1 percent.

To contact the reporters on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Greg Bensinger in New York at gbensinger1@bloomberg.net

Last Updated: October 10, 2008 16:31 EDT
By Jeff Green and Greg Bensinger

Source: Bloomberg

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