Market Impact: 2009 Watch List – Part 5

How the financial health of the Big Three progresses?

With a 35% drop in sales reported by the big three auto companies the financial stress on them has only increased further. This will have its impact on employment as production is reduced. According to NYT G.M.’s chief market analyst, Michael C. DiGiovanni, said that the automaker was predicting industry sales of 10.5 million to 12 million vehicles for the year.

They recently received federal loans which provided some confidence to the market. The US automaker bailout is trickier than it may appear. The conditions that have been imposed - as an expert observed - are “structured for bankruptcy”. By end of March they will to prove that they are viable. By this time they need to negotiate with their creditors to have their debt modified or reduced by two thirds at the minimum. They also need have new agreements with their vendors with new conditions more favorable to them. The compensation and benefits of workers and executives also needs to be lowered. Putting all this together they need to show that they are viable. And if they are unable to deliver they need to repay the loan. This, most observers doubt if can be achieved in such a short period. This would be then a pre-packaged bankruptcy. Their only hope is for Obama to show them leniency.

The key questions are:

Will a pre-packaged bankruptcy be considered to allow them to renegotiate their outstanding loans and work out better arrangements with their dealers and the United Auto Workers?

How much will government interfere in the running of their businesses?

How will the government make it easier for them to do business? E.g. addressing the fifty-state fuel economy and exhaust emission regulations.

Signs of how long the government is willing to stand by these companies given that the whole process to stabilize may require anything between 3 to 5 years and may require upward of $100 bn. over this period.

Will all three be supported equally or the government might want to weigh which has the best chance? It could impact many shareholders which are pension funds and college endowments. It could feed the unemployment numbers also in a big way.

Will a higher federal gasoline tax be imposed to make people move to more fuel efficient cars?

GMAC, the lending arm of GM received $6bn.rescue package which was received by the market with bullishness. As one expert summarized:

GMAC is however not so well capitalized for it to push lending in a big way. Fed while approving for it become a bank holding co. has also asked it improve its capital adequacy by raising $30bn. Of the $6bn., 1bn. is going to GM to subscribe to GMAC rights issue. It has 5bn. of TARP money. For the balance capital requirement (apart from the $9bn. it had as of September) it concluded a debt for debt-and-preferred exchange offer, the deadline for which it had to extend several times. It says enough bondholders swapped their debt for it to meet the Fed’s capital requirement, but that doesn’t leave it with a huge amount of excess cash to leverage into new loans, or act as a buffer against future losses. The fear is that it may have to make more trips to make to the government as it is still loosing money.

There is a fear therefore that GMAC may add to the taxpayer bill further and there a pre-packaged bankruptcy would be a wiser option.

Watch the events unfold keenly as it will have massive ramifications from a market point of view.

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