Blog: Dave LeggettGM's Q2 nasties

Dave Leggett | 4 August 2008

There's an old joke about the banks having you by the short and curlies if you owe them a few thousand bucks. They will pile on the interest charges and won't want to listen too much to your griping if you don't like that. Tough love, they might say, as they rack up the profit on your account and the fat banker gets even fatter.

But if you owe the equivalent of a small country's GNP, then they have to engage with you in more friendly terms lest you start defaulting on payback or go bankrupt and fail to repay the principal. There will be coffee and biscuits on the table when you go in for a chat about debt rescheduling.

I was reminded of that last week when GM announced a whopping 15.5 billion dollar loss for the second quarter. For all the talk of one-time charges, that's a staggering figure.

Is GM therefore heading for the buffers and out of business - or at least into Chapter 11 on its US operations? It's not that simple. GM is still doing fine outside of North America and it simply has to be able to convince investors (and everyone else - including employees) that it is doing the right things to reconfigure its American operations and that it has sufficient liquidity to ride out the economic hard times this year and next.

Indications are that investors are - broadly speaking - okay with that at this stage. GM's share price did not plummet on the back of its horrible looking Q2 bottom line. And if GM has got a lot of bad stuff out of the way with the one-times, then maybe that was worth doing and following quarters' results will see some benefit.

How bad are things getting in the US? The signs from the leasing side of the business and the bad debts there look pretty ominous. There's an adjustment going on in the US economy that is looking structural rather than just cyclical; credit is going to cost more and be less easily available in the future. And the days of cheap energy may well be behind us.

For Detroit (Big Two - let's not get into the unique specifics of Chrysler here), in terms of financial performance going forward, much hinges on the scale and duration of the slump in demand in the US.

GM CFO Ray Young acknowledges that GM has a liquidity bridge from now to the end of 2009. The year 2010, he admits, will be a defining year for GM when it plans to reduce cash-flow burn and generate cash again. An underlying assumption is that the business environment gets better in 2010 and that by then the right vehicles are being produced and marketed in the US.

Investors will be keeping a keen eye on both the emergency bailing taking place this year and next, and preparedness for that opening window of opportunity in 2010. If that window slips to 2011 because of the severity of the economic slump in the US, expect more cost cutting and growing speculation about Chapter 11. And at some point, if things get even worse, filing for Chapter 11 might not seem so unappealing.

US: GM posts $15.5bn second quarter loss


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