Wednesday, July 26, 2006

Yesterday, Today, Forever?

GM reported another gigantic loss, $3.2 billion, but this includes over $4 billion in special charges related mostly to recent job cuts. While I'm always suspicious of special charges, this sounds like progress to me. The company does have an impressive stash o' cash ($35 billion as of 3/06), so they can afford to spend cash now to realize long-term savings.

But the situation remains dire. My favorite cash flow measure (operating cash flow less cash cap ex) has been negative in 5 of the last 6 quarters. GM has $33 billion in bonds and loans coming due between now and the end of 2007. For now, GM can borrow from the capital markets, albeit at a hefty price. As long as that remains the case, the debt maturities can be funded by selling new debt.

However, if their operating situation doesn't improve and their cash balance declines, they may be unable to issue debt. Alternatively, the cost of issuing debt may become so high as to further deteriorate GM's cash flow.

My money is on bankruptcy in 2007.


Anonymous said...

Yes, the cost of funding a junk-laden operation with junk bonds at junk yields tends to lead one down the death spiral rather quickly. Now if they'd managed to chop their employee base 2 years ago, perhaps they'd have better weathered the tightening cycle. As it now stands, I think I'll skip the tantalizing option of GMAC demand notes, with their stellar 6% yield. Lets take bets on Bankrupcty filing, by quarter. My money (in the form of GMAC notes) is on Q2.

Accrued Interest said...

Damn, that would have been my bet. That looks like where the biggest chunk of debt rolling off is. Alright, I'll take 4Q 2007.

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