GM closer to the brink

THE highest-rated, most secure debt ever issued by General Motors has been downgraded again as the value of the company and its assets continue to shrink.

The latest move by ratings agency Standard and Poor’s backs up widespread market perception that GM will deliberately go into bankruptcy so it can effectively walk away from its debt repayment obligations and the entitlements owed to its workers.

At the same time, S&P raised Ford’s overall corporate credit rating three steps to CCC+ - still seven steps below investment grade – after Ford successfully reduced its debt from $US25.8 billion ($A35.4 billion) to $US19.9 billion ($A27.3 billion).

S&P was more severe on Chrysler, downgrading its debt and suggesting it could be headed for bankruptcy leading to liquidation.

There was a big difference between GM and Chrysler when it came to bankruptcies, S&P analyst Greg Maddock said.

“GM would likely survive in the event of a bankruptcy,” he said.

Left: GM CEO Fritz Henderson.

“If Chrysler goes into bankruptcy, I would expect it to go into liquidation. Instead of being reorganised, there would be no car-maker after bankruptcy,” Mr Maddock said.

The GM downgrading came after it became clear there had been no improvement in North American demand for light vehicles in March. It also reflected the dwindling value of GM’s asset pool, mainly cash and inventory, Mr Maddock said.

He left the overall GM credit rating at CC – well below “junk” debt status – “reflecting our view of the likelihood that GM would default – through either a bankruptcy or a distressed debt exchange”, he said.

In recent days the stand-off between GM and its bondholders – who are owed $US28 billion ($A39 billion) for their unsecured debt – has deteriorated sharply.

The bondholders recently rejected an offer that would have given them eight cents of cash, 16 cents of new debt and new GM shares for every dollar they were owed.

That offer no longer stands and the bondholders are looking at a far worse return now.

The Wall Street Journal has reported that the new offer may only include new GM shares, which are pretty well worthless, no cash and not even any new debt.

GM shares closed at $US2.04 ($A2.84) last week, valuing the entire company at just $US1.15 billion ($A1.6 billion).

Under pressure from president Obama and his automotive industry task force, GM has adopted an even more aggressive stance and is offering a new package which includes no cash at all.

In a statement last Thursday, GM said: “It was very clear from the Task Force that we need to take more aggressive actions to restructure operations and reduce liabilities and debt on our balance sheet”.

New GM chief executive Fritz Henderson has warned that, not only will there be no cash on offer, but the amount of new loans GM will offer will be cut sharply.

“Let’s assume you owned $US1000 ($A1392) in bonds,” he said in an interview with Automotive News. “In the end, when the dust would clear from whatever offer you had, you would end up with no more than $US333 ($A463) of debt and you would own some equity in the company.” He was asked if the debt proportion could be less than $US333 ($A463) in a new offer.

“The answer is $US333 ($A463) is not sufficient. It’s got to be less.”

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