US: That b-word just won't go away
General Motors and Chrysler should soon overcome a major hurdle in meeting the terms of emergency government loans, but analysts have warned the cash-strapped automakers remain at high risk for bankruptcy.
Yesterday's announcement by Ford that it had reached a reached a tentative deal with the United Auto Workers union to meet up to half of its US$13.2bn obligation to a trust fund for retiree health care benefits with common stock instead of cash signals that similar agreements are likely at GM and Chrysler because the UAW maintains similar contracts at each of the Detroit Three.
According to Agence France-Presse (AFP), that would allow GM to cut its cash outlays by as much as $10bn and Chrysler to improve its liquidity position by $5.3bn while also meeting a key requirement of the US government bailout package.
But both automakers still have to reach a deal with their creditors and GM has said it would need total aid of $30bn while Chrysler wants $9bn.
The US Treasury will decide by 31 March if restructuring plans the pair submitted last week are enough to ensure long-term viability but is currently asking outside firms to line up contingency plans to examine the possibility of bankruptcy filings, just in case, an administration official let slip yesterday.
"I don't think the administration would force Chrysler or GM into bankruptcy," auto analyst Rebecca Lindland of IHS Global Insight told AFP. "I think the economy might take care of that."
Despite a $787bn stimulus package passed last week, US auto sales are not expected to recover until next year at the earliest, Lindland said.
Global Insight expects US auto sales to fall by at least another 22% in 2009 to 10.4m vehicles, which AFP noted would be the lowest level on a per capita basis since the end of World War II and after nearly a decade of sales that topped 16m a year.
"We don't see the government support as open-ended," Robert Schulz, an analyst with credit rating agency Standard & Poors, told the news agency.
"The bankruptcy risk will be high even in the face of government loans in light of the weak vehicle sales in almost every country."
Liquidation would cost a combined $124bn and 3m US jobs, according to the automakers.
That could certainly make the administration wary of allowing either GM or Chrysler to fail, but there is already a great deal of frustration with government bailouts and many fresh demands for help being made, AFP said.
"It could go a number of ways," Schulz told the news agency. "It's very hard to prejudge the outcome given there's a significant political component to it."
While Ford has so far managed to survive without government help because of hefty cash reserves, it is certainly not in the clear, JP Morgan analyst Himanshu Patel has warned.
"Absent a sizable US volume recovery, we think Ford is only nine to 12 months behind GM in terms of needing federal assistance," Patel reportedly wrote in a research note on Monday.
Patel estimated that Ford's cash reserves would hit its minimum required level of about $9bn by the end of the year and "will probably need to start the political process of seeking aid no later than the third quarter."
While Ford's management will have more time than GM or Chrysler did to cut costs in anticipation of sharply lower revenues, it may have more trouble obtaining a government loan outside of bankruptcy protection, Patel wrote, according to AFP.
Ford would also be badly hit by a bankruptcy at GM or Chrysler because of the impact on the highly-integrated supplier network, Patel added.