Could An Automaker Bankruptcy Happen? Part 2

Implications: In February, I did an article raising the question of a possible automaker bankruptcy. At the time it didn't seem that things could get much worse in the auto sector. Guess what.....they did. With all of the automakers burning through cash at unprecedented rates, perhaps its time to raise the question again.

Analysis: This past Wednesday was not not a good day for the automotive sector. GM shares closed at $14.88 a share, down 5.9 percent. GM shareholders have lost almost half of their value since Feb. 1, when they closed at $28.98. That is roughly $8 billion in lost market capitalization.

The decline in GM's stock price comes on the same day a Deutsche Bank analyst cut his 2008 U.S. light vehicle sales forecast and said GM probably will need an aggressive restructuring plan so it could borrow money to cover its spending.

A few months ago, forecasts of 2008 light vehicle sales around 15 million were seen as being pessimistic, now we are looking at sales of 14.5 million as automakers and dealers struggle to meet rapidly shifting customer demand.

GM is burning cash fast, but it, unlike Ford, still has many unencumbered assets that can be borrowed against. Analysts say GM may have to borrow up to $10 billion secured by assets such as its overseas operations, trademarks for brands and inventories.

Other players in the auto industry also saw their shares fall sharply. Ford Motor Co. shares fell 6 percent. First quarter earnings from CarMax also helped to drag down the sector. CarMax saw its earnings drop by more than half as customers bought fewer light trucks and high-profit SUVs.

Shares of public dealership groups  Lithia Motors Inc. and Sonic Automotive Inc. each hit 52 week lows.

SUV sales have dropped so much that captive finance companies, banks, credit unions and independent lessors will lose billions over the next few years as leased truck-based SUVs hit the market at well under their residual values. Residual values projected three or four years ago could be missed by as much as $6,000 per unit. 

That means GM, which owns 49 percent of GMAC will continue to lose money on its non-automotive operations. It will also effect Chrysler's private equity owners, Cerberus, which owns the other 51 percent.

GM missed a golden opportunity to raise cash in 2006 when Kirk Kerkorian was attempting to "rescue GM." GM stock hit $37 when that love affair was on, and almost hit $42 when Kerk bailed.

If GM delays raising cash, it could be a serious mistake. Credit conditions could be worse a year from now, just when GM is down to its last few billion.