Credit freeze plunges Detroit 3 in cash crisis

Jim Henry

Automotive News | September 29, 2008 - 12:01 am EST

The Detroit 3 face a cash crisis that threatens their solvency before an anticipated recovery in 2010, analysts suggest.

Credit largely has dried up for the Detroit 3 at a time when slumping sales are depriving the companies of critical revenue, analysts say. The near-freeze of credit caused by Wall Street’s meltdown is making it even harder for General Motors, Ford Motor Co. and Chrysler LLC to find new sources of money to borrow.

"With credit being tighter, that affects the ability of the companies to raise new capital and the consumer’s ability to finance new purchases," said Mark Oline, a Fitch Ratings analyst.

GM CEO Rick Wagoner concurred.

"Anything that can be done to loosen up that logjam in automotive credit is going to help, from the standpoint of production, employment and demand for vehicles," Wagoner said last week at the site of a new GM engine plant in Flint, Mich.

"We’ll see how that turns out," Wagoner said. "It seems to be changing by the hour."

Dwindling cash

On June 30, GM had $21.0 billion on hand, down from $27.2 billion a year earlier. At that rate of decline, by mid-2009 GM would have $15 billion on hand — the minimum amount industry analysts say the company needs to conduct normal operations.

Ford Motor reported $26.6 billion in cash and equivalents on June 30, down $10.8 billion from the year-ago date. Fitch Ratings said Ford would reach the danger point if its cash on hand fell to $12 billion.

Meanwhile, Chrysler had $11.7 billion on June 30, after borrowing $2 billion, according to Standard & Poor’s. That’s up from $10.6 billion a year earlier, Chrysler says. Chrysler co-President Jim Press says the company is meeting its cash-flow targets.

Cash flow is the difference between the cash a company takes in and the amount it pays out over a given period. Analysts suggest the Detroit 3 probably can’t expect to add much to their cash cushions this year or in 2009.

Automakers and suppliers are likely to get $25 billion in low-interest federal loans to help produce fuel-efficient vehicles. Those loans could help ease the Detroit 3’s cash-flow crisis.

But the Bush administration says it may take as long as 18 months for the first batch of loans to become available. And the loans will fund only tightly defined projects to improve fuel economy.

In July, GM announced a plan to raise $15 billion through cost cutting, additional borrowing and asset sales. But that plan could be harder to execute in current credit markets.

GM draws down

Last week, GM said it had borrowed the final $3.5 billion of a $4.5 billion credit facility. Much of that amount already is earmarked to repay $750 million of corporate debt that comes due next month and to pay Delphi Corp. more than $1.2 billion as part of the supplier’s reorganization.

"It seemed like a good time to take the money in and make sure it was available when and where we need it," GM Treasurer Walter Borst said last week.

But the move fueled worries about GM’s liquidity. Last week, Fitch downgraded its issuer default rating of GM by a notch to CCC, citing GM’s "lack of access to capital." Such a rating implies that default "is a real possibility," Fitch says.

If Ford’s negative cash flow were to continue at the rate of the past year, its cash reserves would reach the danger level of $12 billion in about 16 months. But over the past year, Ford has spent some cash on one-time items, which suggests its overall expenditures will decline.

The company also has an untapped credit facility worth $11.5 billion, Fitch notes.

Long way to 2010

Many analysts predict a 2010 rebound in U.S. vehicle sales. Moreover, they expect the Detroit 3 to realize big savings on pensions and health benefits in two years under their new contract with the UAW.

But some analysts wonder whether the domestic automakers can hang on until then without running out of cash.

Projections of 2009 U.S. new-vehicle sales range from 13.7 million to 14.3 million units. As recently as 2005, automakers sold nearly 17 million new cars and trucks in the United States.

Worse, unfriendly capital markets are hobbling the Detroit 3’s restructuring plans, said Robert Schulz, a managing director at Standard & Poor’s. During an industry conference last week in New York, Schulz predicted domestic automakers will have to do even more to eliminate jobs and cut production capacity.

Said Schulz: "It’s a long way to go between now and 2010."