Bushonomics: Ford, GM say they won’t file for bankruptcy

Tumbling stock market crushing shares of both Detroit automakers

Workers at a GM assembly plant make final adjustments to SUVs coming down the assembly line. The automaker is reportedly likely to announce more production cuts and possible plant.


10 October 2008

NEW YORK - Executives at Ford and General Motors said Friday they are not considering filing for bankruptcy, even as the tumbling stock market crushed shares of both automakers.

Ford’s CEO Alan Mulally said that the company is focused on conserving its cash and putting restructuring plans in place as it tries to weather the credit crisis and stock market decline.

Mulally said in an interview with The Associated Press that he is not worried about bankruptcy or a takeover, even as Ford’s stock price hit their lowest level in 25 years.

Separately, Ford said Chief Financial Officer Don Leclair will retire effective November 1 and be replaced by the executive credited with leading the turnaround of its European operations.

GM issued a statement Friday saying that while it faces “unprecedented challenges” related to the ongoing problems in the financial markets and weakening economies across the globe, it still doesn’t consider bankruptcy protection as an option.

“Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers, and we believe speculation about a possible filing is exaggerated and unconstructive,” GM said.

A person with knowledge of GM’s plans said Friday that the company is likely to announce more production cuts and possible plant closures as early as next week. The person did not want to be identified because plans are not finalized.

GM has said previously it would make cuts in engine, transmission and metal stamping operations to correspond with four pickup truck and sport utility vehicle plant closures announced in June.

GM announced a plan in July that calls for cutting $10 billion in costs and raising another $5 billion through asset sales and borrowing through 2009.

Shares of GM hit their lowest price since 1949 in the opening minutes of trading on Wall Street Friday as financial turmoil and a weakening global auto market heightened worries that the automaker may be unable to pull out of its nosedive before it runs out of cash.

The company’s shares lost nearly one-third of their value Thursday, plunging to their lowest level in more than 58 years, after Standard & Poor’s Ratings Services said the automaker’s credit could fall further into junk status, making it even tougher to borrow money.

The drop marked the first time GM shares hit the $4 mark since Nov. 16, 1949, according to the Center for Research in Security Prices at the University of Chicago.

David Healy, analyst for Burnham Securities, called S&P’s GM warning “shooting at the life boats.” But given the perilous credit situation, he added the best step for the automaker is to conserve liquidity and focus on its most important model changes.

It’s time to “keep their powder dry,” he said.

“They’re limited on what they can borrow anyway,” Healy said. “They have some liquidity. They have some contractual borrowing power from the banks, which doesn’t depend on ratings. They also have some assets they can sell.”

GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion, but it has been burning through cash at a pace of more than $1 billion a month and needs about $11 billion to $14 billion on hand to keep operating.

GM shares plummeted $2.15, or 31.1 percent, to close Thursday at $4.76 after falling as low as $4.65 — the automaker’s lowest trade since March 15, 1950, when the Korean War was three months away from beginning and gasoline cost 27 cents a gallon.

Ford’s stock price fell 58 cents, or 21.8 percent, Thursday to close at $2.08. It had fallen as low as $2.03 earlier in the session, it’s lowest price since June 1, 1983. Friday morning, Ford shares rose 27 cents, or 13 percent, to $2.35, after initially dropping to $2.05.

Analysts have voiced concerns that the ongoing slump in U.S. vehicle sales could last longer than they previously expected and could spread to other parts of the world, particularly Europe.

U.S. auto sales are down 13 percent through September compared with the same period of 2007, and J.D. Power and Associates on Thursday reduced its sales projections. It now expects U.S. new vehicle sales to total 13.6 million this year and 13.2 million in 2009, down from 16.1 million units in 2007.

Overseas sales in growing markets like Russia and South America been a bright spot for GM as U.S. sales slumped. GM said Thursday, however, that sales of its Opel and Vauxhall brands dropped more than 6 percent in Europe during the first nine months of the year — a sign that the downturn is hitting economies globally and taking worldwide auto sales down with it.

The rapid growth of auto sales in China, the world’s second-largest auto market after the United States, also has slowed sharply.

In addition, the three-week ban on short selling some stocks — including GM and Ford — expired late Wednesday. Short selling involves borrowing a company’s shares, selling them, and then buying them back when the stock falls and returning them to the lender. The practice allows investors to profit from the decline in a stock’s value.

Healy said it’s possible that the expiration of the short-sell ban hurt the automakers’ stocks, though there is no way to know for sure.

“Both stocks have been favorites of the short-sellers” he said. “These are volatile stocks. They go down 10 percent when the market goes down 5 percent, and vice versa.”

Shares of GM have withered since peaking near $94 in 1999 and 2000, and they’re down 88 percent from their 52-week high of $43.20 set a year ago Sunday.

The precipitous drop in GM’s market capitalization — $2.7 billion at Thursday’s close — makes a takeover conceivable, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

“Absolutely,” he said when asked about the possibility. “Except for one thing: lots of debt. And most people are very reluctant. It’s not just the current equity, it’s the debt that you have to absorb at the same time.”

At the end of June, GM reported more than $32 billion in long-term debt, and since then it has exercised $3.5 billion of a $4.5 billion line of credit.