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GM stocks plummet to 65-year-low, to cut 2,000 jobs
Published on Wed, Nov 12, 2008 at 13:25 in Business section
Tags: US Financial Crisis, Stocks , New Delhi
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New Delhi: Stocks of American auto giant General Motors (GM) fell to a 65-year-low on Tuesday.
GM stocks closed under $3 for the first time since 1946. Stocks plunged another 13 per cent as the automaker planned to cut nearly 2,000 jobs.
Shares began their slide on Friday when GM warned that it could run out of cash following a $4.2 billion loss.
Making matters more complicated, GM will have to keep most of these hourly workers on the payroll during the current labor contract, which runs through September 2011.
On Tuesday, the company's bonds tumbled as it burnt through cash and struggled to turn around its business amid a weakening economy and dire sales figures.
Meanwhile, President-elect Barack Obama and other Senators are all pushing for a federal bailout of GM.
GM likely to survive, bonds a "buy": JPMorgan
In spite of this bad news, JPMorgan analysts rate GM's bonds a "buy."
"We believe GM has several sources of liquidity it can access to bridge the company to 2010 when it realizes considerable cost cuts," analysts Eric Selle and Atiba Edwards said in a report.
These include an overfunded pension plan, possible asset sales, capital market transactions, equity injections, cost cutting and government loans, they said.
GM's benchmark 8.375 percent bond due 2033 has dropped to 25.75 cents on the dollar, from 36.5 cents at the end of October, according to MarketAxess. The bonds had traded at more than 80 cents on the dollar at the beginning of the year and currently yield 32.5 percent.
The automaker's credit default swaps are also trading at extremely distressed prices, costing 68.5 percent the sum insured as an upfront cost, plus 5 percent in annual premiums for five years, according to Markit.
That means it costs $6.85 million to insure $10 million in debt for five years, plus $500,000 annually.
"We view the upside (driven by stabilization of U.S. sales volumes and liquidity enhancement measures) on the bonds as much higher and more likely than the downside of a potential bankruptcy," JPMorgan said.
"GM's recent product successes (award-winning styling, performance and quality) and its considerable international profitability give us confidence they can become profitable in North America selling cars," they added.
The analysts added that they have factored in economic weakness for the next 2-1/2 years.
In addition to GM's bonds, selling protection on the debt using credit default swaps is also attractive, as is buying its term loan, JPMorgan said. They added, however that the company's short-term survival will require the help of the government and/or its suppliers.
Analysts at independent research firm KDP Advisors, meanwhile, said they expect GM will benefit from additional government loans and that it is likely to avoid bankruptcy.
They have a "hold" recommendation on its bonds, however, due to the risk that the company may restructure its debt, or push them further down in the capital structure, which will be harmful to bondholders.
"The Detroit automakers have, in essence, been pursuing an out-of-court restructuring over the past three years. These efforts have produced a competitive labor contract with the UAW, a viable solution to reduce retiree healthcare expense, and a substantial downsizing of capacity and headcount," analyst Kid Penniman said in a report.
(With inputs from Reuters)
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