GM's woes

Yesterday, General Motors management took the time to explain how it intended to preserve the group's liquidity in 2008 and 2009. This latest set of restructuring measures comes just six weeks after the previous one (four truck plant closures and sale of the Hummer brand). It involves reducing office worker costs by 20% -- which would presumably mean making several thousand people redundant. This and other measures (including -- pensioners take note -- lower retiree healthcare) would help meet a new target of cutting costs by $10 billion. GM will also stop paying dividend on its common stock for now, reduce capital expenditure by $1.5 billion vs. plan, and sell up to $4 billion worth of assets (e.g. Hummer) to generate liquidity. GM holds some $24 billion in cash, but has an amazing cash-burning track-record. None of the new measures goes beyond the short-term: on the contrary, further cutbacks on white-collars and capital expenditure may well completely jeopardize GM's chances of coming up with a constructive longer-term vision.

Debt and equity analysts alike do not appear to be fooled by GM's latest announcement. Yesterday evening, after market hours, Moody's placed GM's ratings on review for a possible further downgrade (out of solidarity, Chrysler Automotive LLC's ratings are also on review, and those of Ford Motor Co remain on negative outlook). GM's senior unsecured debt is already rated Caa1, highlighting a very high likelihood of default. With sky-high oil prices and a GM portfolio full of fuel-guzzling models, who will want to take up the $2 to $3 billion of new financing that GM intends to issue? Surely not your conservative portfolio manager, but an aggressive breed that is probably betting on a debt-to-equity swap several years (or quarters?) down the road.