The Wall Street Journal reports that the stagnant economy and spiraling commodity prices have brought back the specter of a Chapter 11 bankruptcy filing for a Detroit Three automaker – especially for General Motors.
Market prices for GM's credit-default swaps imply a greater risk of bankruptcy for GM than for Ford, according to the Journal report, and the smaller car maker also now sports a stock-market value almost 50 percent higher than GM's.
In May, GM's truck sales plummeted almost 40 percent from a year earlier. The costs of raw materials such as steel have spiked. And foreign rivals dominate the market for smaller cars, making it difficult for America's manufacturers to raise prices without losing market share.
General Motors isn't the only one affected. Just weeks after posting a surprise first-quarter profit, Ford admitted it is unlikely to meet its target of turning a profit for all of next year. Still, Ford stuffed its coffers before the credit markets crashed. It now has roughly $29 billion in cash, almost double what it is expected to burn through in the next couple of years.
By contrast, GM – which seemed to have covered itself well by selling assets before the buyout markets skidded to a halt last year – could end up with less than $1 billion by 2010, thanks to a combination of cash-draining losses and debt repayments, according to Lehman Brothers Holdings. Even if it tapped bank credit lines, it would by then have less on hand than the $10 billion or so analysts reckon it needs to support its everyday business.
– By Ed Coury, senior editor and Midwest bureau chief for the Wall Street Journal Radio Network, Dow Jones & Co., and a reporter for WWJ Newsradio 950. This report includes information previously published by Dow Jones Newswires.
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