Municipal Bond Forum
GM
Q
Can you give me your opinion on GM? Based on the legacy of the pensions and medical cost they have, their poor lineup of cars, loss of market share and high gas prices, I see no way they can avoid Chapter 11 if they want to level the playing field and be able to compete with Toyota and the likes.
A
James A. Klotz responds:
Clearly, as you mention, General Motors is facing onerous internal burdens related to employee retirement and health costs while also being challenged by an unfavorable market reception for its cars. The important question to ask is whether GM can weather the storm. We believe it will.
GM’s recent abrupt announcement that it was revising its earnings estimates downward surprised Wall Street and brought negative reactions from all three rating agencies. The company’s new estimates foresee a first quarter loss and reduced earnings for the year to the $1 to $2 per share range.
We see no cause for panic. The automobile industry is cyclical by nature and its major players have gone through this before. Chrysler, the smallest of the “Big Three,” offers the best turnaround example.
GM’s challenges are great, but so is its opportunity. The company, and its GMAC subsidiary, are sitting on approximately $50 billion in cash, it is still forecasting a positive bottom line, and despite market share erosion, remains North America’s largest automaker. Certainly, if GM were to do nothing, the slide would continue. But, that is not likely to be the case. We believe both GM and the United Auto Workers recognize that health care and pension costs must be brought under control if GM is to remain competitive in its markets. We also believe that GM will undertake a reorientation of its brands and models to better suit changing consumer tastes.
This all takes time. In fact, things may get worse before they get better. But, GM has weathered two world wars, the Great Depression, oil shortages and countless economic downturns. At this point, we see no reason to believe GM won’t turn the ship around. GM has the resources and, we believe, the support of labor to reform itself and remain a major automobile producer, although likely on a smaller scale.
For GM bondholders, we believe the company’s problems will have few repercussions on its debt. GMAC bondholders, in particular, are secured by automobile loans made in the past to purchasers of GM’s cars. People making car payments don’t stop because the company’s earnings forecast has changed. Second, GM has numerous assets it could monetize if it needed to raise cash. And cash will be plentiful in the foreseeable future. Third, should a rating downgrade occur, it by no means portends a bankruptcy. Many of America’s largest companies (such as Georgia-Pacific) are rated in the “BB” range, are profitable, and continue to make timely debt service payments.
In summary, we acknowledge the problems GM faces, but we also recognize the resources GM has at its disposal to become a smaller, more nimble competitor in the world’s automobile markets.
Start here.
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