19 November 2008

GM and Ford Stocks and Bonds Have Collapsed

Telling Congress that your company is about to die turns out to be less than wonderful for your company's stock price, particularly if Congress seems skpetical:

Automaker shares also tumbled. General Motors shed 50 cents, or 16 percent, to $2.59, while Ford dropped 41 cents, or 24 percent, to $1.27.

General Motors has a market capitalization of about $1.7 billion. Ford Motor Company has a market capitalization of about $3.1 billion. The combined fair market value of all three of the Big Three automobile markers combined is about a fifth of the $25 billion bailout loan that the industry has requested. The current proposal from Barney Frank in Congress would give a bailout loan priority over other debts in bankruptcy, so a bailout would help stockholder and bondholders only if a bankruptcy is avoided with the loan.

The stock price of the major automobile makers doesn't tell the whole story, however. You have to look at bond prices as well to see the sorry state of these companies:

Bonds issued by Ford Motor Co. and General Motors Corp. have been trading well below par value, at about 25 cents for every dollar invested, down from about 75 cents to 80 cents a year ago.

They sold off further Wednesday, with GM's 8.38% bond due in 2033 selling at just 17 cents per dollar, down from 21 cents Tuesday, according to KDP Investment Advisors. Ford's long bond, due 2031, fell 1.5 point to 24.50 cents.

Prices at these levels, or about one-fifth of the bond's face value, are similar to the recovery rate bondholders often see after a company goes through bankruptcy and indicate investors think a government bailout unlikely.

In interest rate terms, the current effective yield on GM bonds is 49.3% per year.

At its peak, General Motors has a market capitalization above $66 billion. The General Motors balance sheet is also worth reviewing:

The market capitalization of General Motors is now $2.69 billion and a book value of negative $57 billion. Book value has been negative since sometime in 2006. The Company has lost $62 billion over the last twelve months on sales of $171 billion.

At the end of the second quarter of 2008, GM had about $20 billion in cash, $35 billion in current assets like inventory and accounts receivable, $11 billion in financing and insurance operations assets (like its interest in GMAC), and $62 billion in non-current assets like plant and equipment, and $18 billion in pre-payments to the pension plan. The value of plant and equipment would probably plummet if GM failed, as it has few good alternative uses and the overall market for the vehicles that GM makes in those plants is in decline -- that is why General Motors is in trouble.

On the liability side, General Motors had $75 billion in short term liabilities (like accounts payable, short term loans and current portions of long term debt), $4 billion in debt and liabilities in connection with finance and insurance operations, $32 billion of long term debt, $47 billion of post-retirement obligations other than pensions, $12 billion of pension liabilities, and $21 billion of other long term liabilities.

More than 97% of the stock value of General Motors (more than $64 billion) and about 83% of its bond value (about $28 billion) has been wiped out.

Critics of a GM bankruptcy worry that consumers will not buy cars backed by a warranty from a bankrupt company, but the value of a standard five year warranty from General Motors or Ford is actually probably worth less now than a warranty from a company that is actually bankrupt, where post-petition warranty claims might be entitled to priority as an administrative expense.

Warranty expenses over the life of the product for a GM car or truck average about 2.7% of the sales price. It would cost General Motors about $8 billion (its current reserve for warranty expenses) and 2.7% of new sales to pre-fund all of its warranty liability. If an ability to back old warranties really is essential to a bankrupt automaker's survival, that is $8 billion less that will be available to other creditors (mostly retirees and bond holders) in a bankrupty.

Gasoline prices have fallen to below $2 a gallon from a peak of more than $4 a gallon in the U.S., and may fall further as a global recession slows demand, but it isn't obvious that this will significantly restore sales of SUVs and light trucks that get poor gas mileage. While consumers tend to ignore predictions of high future gasoline prices in their buying decisions, once burned they are twice shy.

1 comment:

Anonymous said...

Someone needs to talk about taking all the surplus investory at Ford, and perhaps GM, and sell it to China, and then let them broker it through asia, but mostly china. This will get rid of the investory which lies dead. It is cheaper than the bailouts, which the chinese are financing. The chinese and asias get cars. we get rid of them.

Next time Hillary goes to china, whisper this idea into her ear.

Philip Cowen
Law Office of Philip Cowen
Brownsville, Texas
with 4 brothers who have been in the car business.