That General Motors (GM), at least, is heading for liquidity crises is taken as a given by Citi analysts. But they urge GM and Ford (F) to avoid Chapter 11 and seek “workouts” instead. Neither route is attractive for shareholders: the former could mean a bagel, the latter massive dilution.
Citi thinks Ford’s liquidity position is fine for now, but isn’t so sure about GM:
Facing perhaps one of the most severe downturns in history, the Detroit 3 will require significant cash resources and time to adjust operations for the “new world” realities of higher oil and commodity prices. Amongst the Detroit 3, we continue to believe Ford’s (F-2S) 1-2 year liquidity remains adequate. General Motors’ (GM-2S) liquidity is likely to tighten over the next year, increasing the need to raise cash in difficult capital market conditions.
Citi goes on to suggest that the Big 3 should avoid bankruptcy because customers would fear the repercussions for quality, warranties, and deal support:
In the event a Detroit 3 OEM was unable to shore up liquidity, we believe a workout scenario would become a better avenue to pursue ahead of a Chapter 11, though either is ultimately possible. A bankrupt automaker could face market share losses as consumers walk away from the OEM fearing diminishing quality, void warranties, and weaker dealer support. Under this scenario, the business model could be left with irreparable damage that leads to worse recoveries for claimholders. Rather, an out of court workout scenario, while very complex to negotiate, would likely be more suitable for all stakeholders. Workouts could include dilutive equity-for-debt recaps, more labour savings and/or alliances.