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MAY 9, 2005
GM's Ace in the Hole: Cash Liquid reserves of at least $45 billion help the carmaker keep its credit rating above junk and give it some flexibility to maneuver Give credit where credit is due. For all of the problems General Motors (GM ) faces, liquidity isn't one of them -- yet. Under Chief Financial Officer John M. Devine, the auto maker has built up a sizable cushion of cash -- upward of $20 billion. That's not including what GM can tap in its prefunded retiree account, any assets it might sell (particularly from its finance subsidiary General Motors Acceptance Corp), and a number of other cash-creating financial options. Add it all up, and the available sources of cash and saleable assets total almost $45 billion -- and that's in addition to the billions in cash on the books at GMAC. Such liquidity is crucial for a company that has started to turn cash-flow negative. "The company really does not face any liquidity stresses at this point," says Mark A. Oline, an analyst at Fitch Ratings. STILL MAKING GRADE. If management can't find a way to revive sales and reduce enormous fixed costs, neither bankruptcy nor a private-equity carve-up is out of the question for GM. However, its cash cushion certainly buys it time and makes either of those undesirable outcomes unlikely in the near future. Indeed, GM's strong liquidity position partly accounts for the reason its debt rating hasn't yet sunk below investment grade. Standard & Poor's rates GM debt BBB-, as does Fitch Ratings. Moody's gives it a Baa3 rating. Those all fall one notch above junk. Let's take a closer look at where GM cash comes from, leaving aside the profitable GMAC and the money it throws off. Right now, GM has $15.6 billion in cash, cash equivalents, and marketable securities. It gets credit for $4.2 billion of its prefunded retiree benefits account (what's known as the VEBA, or Voluntary Employee Benefits Account), which it can tap in a pinch. That puts its cash at $19.8 billion. Plus, it has $8.3 billion available in bank lines. PRESSURE TO RESTRUCTURE. If things get really bad, GM can trim, or eliminate altogether, its dividend, which now eats about $1.1 billion in cash per year. Some analysts think GM should take that step sooner rather than later. "This way they could enhance their liquidity, and free up more funds for investment," says Efraim Levy, an S&P equity analyst. "It's better to have extra cash than not." Add that up, and you have almost $30 billion in cash potential from the auto side of the biz. That, according to many credit analysts, amounts to enough to cover GM's expenses, maturing debt in the near future, and the cash losses that come with each dip in market share for the next few years. That's not to say that GM can simply abide quarter after quarter of falling market share. A continued, persistent slide in market share would apply more pressure on management to take aggressive steps to restructure the business. "[That] means there could be ongoing cash calls related to restructuring of the North American business," says Brian Zinser, a senior credit analyst at Merrill Lynch who follows auto companies. "It feeds on itself." TOUGH TRADE-OFF. Furthermore, if the business continues to deteriorate and GM keeps gushing cash, it could hinder its ability to tap the capital markets. Should GM's credit rating also slide to junk -- which many analysts believe to be an inevitability -- that would make the situation doubly worse, as banks and other lenders would tighten up. "In particular, that's a concern for the finance company," says Zinser. That's why GM has already made noises about selling off parts of GMAC. Analysts estimate GM could fetch anywhere from $10 billion to $15 billion for its mortgage and insurance operations. If sold at the high end, GM's cash cushion would approach $45 billion. "If you monetize it now, you get probably a pretty good multiple for the business...and you get some liquidity in the door today," Zinser says. It's a trade-off: GM has come to rely on GMAC to kick up profits and cash for the health of the overall company, so losing the future income stream could hurt. On the other hand, in a rising interest rate environment and with a possible junk rating, the GMAC assets may not win as good a price if GM waits. And in order to start fixing its problems, GM has to get its timing right.  By Brian Hindo in New York Edited by Patricia O'Connell
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