Goldman Sachs analyst Patrick Archambault put a “sell” rating on General Motors today after GM said late Friday that it was drawing down the remaining $3.5bn of its $4.5bn revolver line of credit. The draw comes ahead of significant cash outflows, said Archambault, such as a $750mn debt maturity in October and more than $1.2bn in cash payments to Delphi. The company also announced it had completed a $322mn debt exchange for 28.3mn shares.
Archambault: “We had previously thought GM might draw down the secured revolver by year-end in the absence of any alternative funding source. Given the uncertainty facing US financial institutions at present, we think securing the additional liquidity is understandable. However, we see the liquidity draw as a net negative, as it suggests that GM itself sees limited funding options in the near future, despite the unprecedented Fed and Treasury actions being contemplated. On our current estimates GM will need to raise $8bn in cash to keep its balance within the $11-$14bn range it needs to operate. As we have previously highlighted, we expect GM to obtain additional liquidity from a $25bn Federal loan package for the sector that we think will be appropriated at the end of the current legislative session. The recently announced Treasury proposal to buy distressed assets complicates an already confusing political situation for the auto loan program, but the likelihood of funding remains fairly high in our view. This would be positive, but GM would need to raise additional capital in our view, or seek more union concessions and/or dilutive alternatives like debt for equity swaps on a much larger scale than the $322mn announced on Friday.
“We continue to think headlines surrounding the Federal loan program will be a short-term positive for GM that will play out in coming weeks. Our Sell rating is based on a longer-term cyclical deterioration in auto fundamentals that we see being exacerbated by tightening credit and general de-levering of consumer balance sheets.”