General Motors (GM) stock hit its lowest level in 53 years yesterday as bankruptcy rumours ricocheted around Wall Street. The company insists that it has enough capital to make it through the end of the year, but needs more thereafter. Unless GM’s plan is to re-organise under Chapter 11, it should bite the bullet and raise cash immediately.
GM had about $31 billion in cash and credit on hand at the end of Q1, but analysts are not confident that this is enough to keep GM afloat.
On Wednesday, Fitch Ratings cut debt ratings on GM even deeper into the “junk” category,” citing further weakened sales and still climbing gas prices. Goldman analyst Patrick Archambault cut GM to SELL yesterday and said this:
GM’s automotive cash flow burn this year and next is likely to lead it to look to raise capital…[this] could lead to significant shareholder dilution.
GM’s CEO, Rick Wagoner responded by saying the company could make it through the end of 2008, but acknowledged that it would need cash thereafter.
As we’ve said before, we’ve got a very good, solid funding base under any scenario we see, solid through the end of this year…We have a lot of options to fund beyond that.
The end of 2008, it should be noted, is only 6 months away.
“Too big to fail” is a nice mantra, but it shouldn’t–and probably won’t–apply to GM. The market is already preparing for the worst. Bloomberg:
Short-seller James Chanos, president of Kynikos Associates Ltd., said in a Bloomberg Television interview yesterday that GM should consider bankruptcy…
Short interest in GM more than doubled to 120 million shares as of June 13 from 54 million at the end of 2007, indicating more investors are betting the shares will decline.
Credit-default swaps on GM debt climbed 276 basis points today to 1,889 basis points, according to CMA Datavision in New York. The contracts are designed to protect bondholders against default. A rise in the price indicates a decline in the perception of a company’s credit quality.
A bankruptcy filing would screw stockholders, of course, but it could actually end up being good for the company. One major cause of the US car industry’s problems are massive benefit liabilities that foreign competitors don’t have. Chapter 11 might give GM the flexibility to permanently resolve this issue.
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