Merrill says GM bankruptcy possible

Auto giant will require $15B in cash to shore up liquidity, report says

Soyoung Kim, with files from Nicolas Van Praet, Reuters; with files from Canwest News Service

Published: Thursday, July 03, 2008

DETROIT - General Motors Corp. will need to raise as much as $15 billion in cash to shore up liquidity and bankruptcy is a possibility if the U.S. auto market continues to slump, Merrill Lynch said.

Other analysts have suggested GM, shares of which fell to a new 54-year low yesterday, needs to raise funds to ride out the downturn in the U.S. auto market through 2009. But Merrill's estimate of GM's financing needs is the highest yet. It also carried the most stark warning of the bankruptcy risk for the largest U.S. automaker.

GM declined to comment directly on the Merrill Lynch report, but it believes it has sufficient liquidity for 2008 despite lower volumes and could take more steps to cut costs if sales conditions worsen.

"If conditions continue to deteriorate, we would consider other operating measures," GM spokeswoman Renée Rashid-Merem told Reuters.

Merrill Lynch analyst John Murphy lowered his price target for the largest U.S. automaker to $7 from $28. Shares fell as much as 11 per cent to $10.50 in yesterday's trading on the New York Stock Exchange. The cost to insure GM's debt also rose.

Mr. Murphy also lowered his forecast for 2008 U.S. industry-wide light vehicle sales for the third time this year and said the recent drastic decline in sales would likely continue through 2009.

Mr. Murphy forecasts light vehicle sales of 14.3 million units this year and 14 million units for next year. That compares with 16.15 million units in 2007 and is sharply lower than the current forecast of most major automakers, including GM.

"The recent extreme deterioration in volume and mix is driving much higher cash burn and eroding GM's cash position," Mr. Murphy said. "We believe $15 billion is necessary because there is downside risk to our current estimates and a greater cushion is essential."

Meanwhile, the dramatic shift among U.S. consumers away from trucks is starting in Canada as sales of full-sized pickups took another double-digit tumble last month, a top General Motors of Canada executive says.

Sales of big pickups for all automakers fell 24 per cent in May and a similar decline is expected for June, said Marc Comeau, vice-president of sales for GM Canada. He said sales of personal-use pickups are in steep decline amid higher gasoline prices.

"What's been playing out in the United States is starting to play out here as well," Mr. Comeau in an interview. "People that are looking at the price of fuel are delaying their purchases or waiting to see where the price is going to go."

GM, Canada's largest automaker by sales and production, said it estimates industrywide sales in Canada to come in at five to six per cent higher than last June levels when adjusted for three fewer selling days. GM's truck sales were down 27 per cent in June year-over-year while its car sales were generally flat using the adjusted numbers, Mr. Comeau said.

In the U.S., a June sales report that showed industrywide auto sales dropping to a 15-year low.

GM's U.S. sales fell by a narrower-than-expected eight per cent on an adjusted basis after the automaker offered zero-per-cent financing for six years.

But Deutsche Bank analyst Rod Lache said GM could see a "payback" from its June sale in coming months, with its U.S. market share dropping back below 20 per cent from 22 per cent in June as sales fall back.

Several other Wall Street banks including Citigroup also downgraded automakers and parts suppliers yesterday and lowered their outlook for U.S. auto sales this year and next.

Industry tracking firm Global Insight cut its forecast for the annualized sales rate in July to 14.4 million units and cut its 2009 forecast to 14.2 million units in sales, citing the risk of higher average oil prices in the months ahead.