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THE FINANCIAL CRISIS : AUTOS

GM, Ford may be just too big to fail

Given their huge presence in the U.S. economy, bankruptcy appears unthinkable.

October 10, 2008|Ken Bensinger | Times Staff Writer

With sales of General Motors and Ford vehicles down more than 17% this year and the companies' stock prices at lows not seen in decades, one might expect the bankruptcy vultures to be circling over Detroit.

General Motors Corp. closed Thursday down 31%, to $4.76. That was its lowest finish since March 1950, according to Global Financial Data, prompting jokes among traders that GM was now a mid-cap stock.

Ford Motor Co. closed down 22%, to $2.08 -- for a market capitalization of $4.7 billion, scarcely above that of Magna International Inc., which makes, among other things, the rearview mirror for the Ford Edge.

Amid concerns about access to credit, low consumer confidence and precarious cash positions, the debt ratings of the U.S. carmakers have slid deep into junk range. GM, once AAA rated, is now a B-, and Ford is slightly above it at B. On Thursday, Standard & Poor's said it would consider further downgrading GM. And this week, industry forecasters said U.S. car sales would be down 20% this year compared with 2007.

It's a grim financial picture, but talk of the companies' filing for bankruptcy protection has been surprisingly muted. Financial and industry experts are speculating that the automotive giants may simply be too integral to the economy to go under.

"For GM and Ford to fail, some pretty catastrophic things have to happen," said Brett Hoselton, equity analyst at KeyBanc Capital Markets. "Then again, things are pretty bad now."

Beyond just selling cars, the Michigan automakers have a huge financial reach, representing millions of jobs in the supplier, sales and aftermarket sector; they each have stakes in large financial services companies selling loans, leases, insurance and, in the case of GM, mortgages; and their value as symbols of U.S. industrial might is something few politicians are willing to overlook.

Although 2008 is proving a tough year for all carmakers -- Toyota Motor Corp.'s shares have slid 46% in the last year, and Honda Motor Co. is down 38% -- the picture for Ford and GM appears much worse.

Both are struggling under the weight of automobile lineups long on trucks and SUVs and short on the fuel-efficient cars consumers suddenly want.

Each company has substantially more liabilities than assets, and with declining sales, the picture is dim for profits: GM lost $18.8 billion in the first six months of the year, and Ford lost $8.6 billion. Despite a sizable reserve of cash on hand, GM last month drew down $3.5 billion of a $4.5-billion credit line, citing "uncertain times in the capital market."

Bruce Clark, an analyst at debt rating service Moody's, acknowledged that "their balance sheets are very weak" but said he would be surprised if either company went belly up. "It's not that a voluntary filing can't happen, but the costs associated with the bankruptcy of an automobile manufacturer are generally too high."

For starters, both companies still have a lot of money on hand. At the end of the second quarter, Ford had $26.6 billion in cash and cash equivalents, and GM had $21 billion, which even the most negative analysis suggests should be enough to get through this year and most of 2009.

Both still have access to lines of credit and are expecting significant cost reductions starting in 2010, when many of their healthcare and pension liabilities to retirees and union workers will be reduced under a new labor deal.

In recent months, executives at both companies have revealed plans to cut costs significantly by reducing production and workforce; both have also floated the possibility of asset sales.

"We face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets," Renee Rashid-Merem, a GM spokeswoman, told Bloomberg News on Thursday. "But bankruptcy is not an option GM is considering."

According to Clark, a bankruptcy filing would probably have terrible effects on the residual value of cars and their warranties, making it even harder to sell new cars as consumers gravitate to other, more stable carmakers. That, he said, means that carmakers would choose to stay out of bankruptcy far longer than companies that might normally see it as a way out of untenable financial straits.

GM has a 49% stake in GMAC, a huge lender that not only finances car loans but also holds billions of dollars in residential mortgages. Ford, too, has a large finance arm, and both used their status as lenders to get the companies put on the Securities and Exchange Commission's list of firms temporarily protected from short sales. Executives at both companies have said they expect that under the $700-billion rescue package passed by Congress last week, they will be able to sell impaired securities on their books to the Treasury Department.

But perhaps the most compelling argument against going under comes as a result of the companies' unique position in American industry.

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