Auto Bailout, yea or nea?

[motordavid]

Originally Posted by X5rolls

Wonder if this will be enough to save the ship?

In this columnist's opin, maybe not. From Monday's NewYawkTimes:

Debt Could Crush G.M.’s Best Efforts

By ROBERT CYRAN
Published: January 11, 2009

The government’s rescue package for General Motors comes with some ugly conditions attached for debt holders, union members and the company itself. Chief among these is a requirement that the automaker demonstrate a plan for achieving a positive net present value. Even with deep cost cuts, debt restructuring and union concessions, a back-of-the-envelope calculation suggests this is out of reach.


Any calculation about G.M.’s worth must start with its debt-laden balance sheet. In return for handing over up to $13.4 billion in emergency loans, the Treasury is calling for G.M. to wipe out two-thirds of its unsecured debt by swapping it for equity. Assuming lenders agree — and this is a gargantuan task in its own right — that would leave G.M. with $12 billion of unsecured and $6 billion in secured debt. Include the government handout and the total jumps to $31.4 billion.

Add to that G.M.’s onerous legacy obligations. First, there are health care costs. The Motown manufacturer has done a good job reducing these in the last couple of years. But it still has to pay $10 billion in cash into the independent fund for United Automobile Workers members’ benefits. And the net unfinanced health care liabilities for non-U.A.W. workers currently stands at $8 billion, though that’s expected to drop as a result of cutbacks announced last summer.

Then there are G.M.’s pension benefits. For simplicity’s sake, let’s just concentrate on the plan for United States workers. That was fully financed at the end of 2007, but it would be astounding if last year’s market turmoil in virtually every asset class did not send it into the red. Joshua Rauh, a professor at the University of Chicago, estimates G.M.’s plan may be underfinanced to the tune of $23 billion.

That may be too pessimistic, but let’s assume the figure is around $10 billion. Because of some tax credits that the company has stored up for previous losses, G.M. doesn’t have to cover a shortfall imminently. But add it to the rest and the sum of G.M.’s liabilities hits almost $60 billion.
What does G.M. have on the asset side of its ledger to offset these liabilities? It will have some $15 billion in cash after the government injection, though its history suggests it could burn through this swiftly.

Its stake in lender GMAC might be worth, at best, its book value of $5 billion. Stakes in Asian partners look to be worth another $5 billion. Add these up and G.M.’s car unit must be worth at least $35 billion to meet the government’s stipulation that it have a positive net present value.

Can it get there? Analysts estimate G.M. should have car sales of around $135 billion this year. While down from the $150 billion or so the company should have tallied last year, it may also be optimistic given the way the United States economy is contracting and consumers are pulling back.
Well-run car companies, like Renault, tend to have low profit margins — indeed, 3 percent constitutes a decent showing in the business.

It’s possible that G.M. could achieve something like this, but it won’t be easy given all the disruption that may result from negotiations with workers, suppliers and dealers as it rushes to meet other requirements attached to the government’s loans.

Still, if one takes this relatively charitable view of G.M.’s sales and earnings power, it implies about $4 billion in operating earnings. Once taxed and put on a multiple of 10 — which is basically an assumption that the income stream neither grows nor shrinks over time — G.M.’s car business would be worth about $28 billion.

That’s not quite enough to meet the requirement that G.M. achieve a positive net present value, despite hard concessions by all its stakeholders and a dollop of government largess. Of course, there’s always the chance that pension and health care costs will be less onerous. Maybe its pension fund managers did do better than the market — and 90 percent of the investment management industry.

And the company will no doubt unveil all sorts of other valuation metrics and optimistic projections about cash flows to show the company has positive value. But by this back-of-the-envelope calculation, even tough action may not persuade the government that G.M. is sound enough to escape bankruptcy.
ROBERT CYRAN

http://www.nytimes.com/2009/01/12/bu...0Motors&st=cse

[X5rolls]

Thanks for the link!

Sounds like an opening bid and a longshot to stave off bankruptcy.

I'd love to see the assumptions in the models and summary analysis done by GM outlining the options for cuts and understand the rational behind the plan.

The Federal Gov't, UAW and other creditors are due to ante, call, raise or fold.