Until recently, it was unthinkable that General Motors Corp., the world's largest industrial company, would ever be mentioned as a candidate for bankruptcy. After all, GM's corporate coffers hold $110 billion in assets, including $6.3 billion in cash and marketable securities. That's a big cushion against insolvency. So when GM's huge losses recently sparked rumors that it was considering a Chapter 11 filing, company executives dismissed the notion as ridiculous. "We're the largest company in the world, with lots of assets. We're nowhere near Chapter 11," fumed new Chief Executive John F. Smith Jr.
For now and the foreseeable future, Smith undoubtedly is correct. But such dire talk shows how quickly the financial noose around GM's neck is tightening. The company's underfunded pension liability will widen by $1.9 billion this year, to about $11 billion. An accounting change for retiree health benefits could bite from $16 billion to $24 billion out of GM's reported net income and from its $31.4 billion in shareholder's equity. Worst of all, the carmaker, still bleeding cash, may face a downgrade of its long-term debt and short-term borrowings within weeks. Moody's Investors Services, Standard & Poor's, and other rating services all have put GM's debt under review.
It is the continuing cash drain from GM's U.S. and Canadian auto operations that worries creditors most. Salomon Brothers Inc. figures the company's 1992 cash flow, after dividend and capital spending obligations, will run a negative $2.5 billion (chart). GM's Electronic Data Systems data processing unit and its finance and European car operations were profitable in the year's first nine months. But that was more than offset by North American auto losses. Then there was the $1.1 billion in dividends GM paid stockholders and the $4.7 billion for capital spending.
QUICK CASH. GM's strategy for stanching the outflow of cash can't go on much longer. To cope, the company this year has replenished its coffers by issuing $5.1 billion in new common and preference stock. GM has said it plans to begin selling an additional $1 billion in preference shares within a few weeks. Some analysts believe the sales are GM's attempt to stockpile cash while its credit ratings remain in place. A downgrade could put a crimp in GM's game, notes PaineWebber Inc. analyst Stephen J. Girsky, by boosting its borrowing costs and limiting its ability to raise new capital.
The ratings downgrade, if it comes, will also hamper General Motors Acceptance Corp., the GM financial arm that funds loans to car buyers and dealers. GMAC has some $20 billion in short-term IOUs outstanding--mainly in commercial paper. That paper currently holds top credit ratings.
But GMAC looks to be preparing for a ratings downgrade of its own: To increase liquidity, the unit over the past year or so has added some $5.5 billion in short-term marketable securities and paid for it by selling assets, including $10.8 billion in consumer car loans. Meanwhile, it is paying more to borrow longer term, while reducing its commercial paper outstanding by $8 billion this year. To focus on its core GM auto business, GMAC has dropped out of boat and heavy-equipment lending, and on Nov. 18 said it also will stop making new loans to non-GM dealers and car buyers.
NO MORE SURPRISES. Despite the defensive moves, GMAC may not be able to forestall a downgrade. If the credit agencies move, GM would be effectively removed from the commercial paper market, since the Securities & Exchange Commission won't allow money-market funds to buy paper from companies that aren't rated in the top tier by at least two credit agencies. Such funds now buy nearly all of GMAC's paper. The result: GMAC says it would have to sell off more of its auto loans and begin to draw on a $12.4 billion bank credit line. Worse, all of this would probably knock $100 million to $300 million off GMAC's 1993 earnings, cutting 1993 profits to $1 billion or less, GM says.
A longer-term worry is GM's future obligation to retirees. New accounting rules require many large companies, including GM, to write off future liabilities for retirees' health benefits no later than early next year. GM could spread the charge over 20 years, and the $16 billion to $24 billion hit won't directly affect cash flows. But it will cut into income and stockholders' equity. As for its widening unfunded pension liabilities, GM doesn't have to make any more payments into its pension fund for now, but may have to eventually.
GM Executive Vice-President William E. Hoglund swears the company isn't planning any fourth-quarter surprises, such as last year's yearend $2.8 billion restructuring charge. Nonetheless, GM's efforts to sell an 81.5% stake in National Car Rental System Inc. will likely result in a $300 million aftertax charge. The expected sale of a 50% stake in Daewoo Motor Co. and a transmission operation will add back $225 million to the bottom line, however.
The big questions now: When will cost-cutting and improved auto sales start to move GM back into the black? Analysts figure that GM's slashing already has cut pretax North American auto losses by about half, to $3.4 billion, in the first nine months of 1992. Smith also has said that GM's North American operations were significantly in the black during October, for the first time in 24 months. More losses are expected in traditionally weak November and December, but Smith promises that the operation will break even, before taxes and interest, next year.
As a result, analysts project that GM in 1993 will make money for the first year since 1989. One major reason: United Auto Workers sources say that the depth of GM's troubles has convinced the union it must cooperate with Smith's cost-cutting.
"This ship is slowly turning," contends PaineWebber's Girsky. True. But Jack Smith must turn it around faster if he wants to quash those rumors about GM's solvency once and for all.