Chrysler had a fair amount of trouble re-financing a relatively large portion of its debt. The company’s finance division was only able to raise $24 billion to replace a $30 billion facility. The money did not come cheap, According to The Wall Street Journal, "The $24 billion it raised came in at 1.1 to 2.25 percentage points above Libor, making it harder for Chrysler to offer cars to consumers at attractive terms."
Ford (F) and GM (GM) can step into H.G. Wells time machine and travel forward a year. They are likely to find that raising money will be be as hard as it has been for Chrysler, if not harder.
By most counts, Ford and GM will have to raise several billion dollars. Their sales shortfalls in North America are simply too great compared to their abilities to cut costs. GM eats through $1 billion in cash a month. It has, by its own account, $21 billion in cash and securities. By the end of the first quarter of next year, it will have a very significant problem.
Bringing in new money creates two immediate predicaments. The first is that the high interest rates will mean tremendous debt service payments. Those will be married with negative operating income creating an awful leverage. Just as important, current holders of common shares will face dilution which could go as high as 50%.
Detroit’s problems are turning from operational issues to balance sheet woes. Credit markets are not going to improve over the next four quarters. Car stocks may appear to be attractively cheap now, but they are not.
The only thing that will lift Ford or GM shares are buy-out offers. VW and Nissan/Renault may come calling with check books. For them buying the companies and cutting costs through consolidation just might work. It could also get either one 20% of the US car market.
Douglas A. McIntyre
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