GM BK Odds
Today, GM announced plans to close nine production plants, eliminate 30,000 U.S. manufacturing jobs and cut its car-making capacity by 1 million by 2008. Gm officials declined to say when the multi-year, multi-billion cost-savings programs would restore the auto maker to profitability.
From Rick Ackerman's Rick's Pick's an interesting analysis of GM’s bankruptcy prospects. It is the work of Gordon Haave. Our comments in italics:
The Devil can only view GM as a huge pension fund primed to go bust, and there’s no reason why Beelzebub will show any more kindness to auto workers than he has to airline employees.
With all the speculation about how Helicopter Ben might handle the recession that could scuttle GM (and Ford), few have observed that the U.S. is already hemorrhaging funny-money vouchers to prop up the airlines.
This is being done, not surreptitiously, or through the Bernanke-friendly provisions of the Monetary Control Act, but indirectly and in such a manner as to suggest that the bailout is just capitalism at work.
We see that the U.S. Pension Benefit Guaranty Corp. has made commitments well in excess of its capital, receiving airline shares in return. Perhaps this explains the latest run up in airline stocks? Things couldn't get any worse after 9/11, Iraq, Katrina & the Oil Price Shock. And it helps to have the BK laws and PBGC in bed with you.
Good thing at least one quasi-governmental investor still has faith in the airlines, since individual investors continue to treat their shares like toxic waste. Is Delta Airlines as good a risk as Chrysler was 25 years ago? How about GM? Before you leap to Kirk Kerkorian’s side, consider the logic of Mr. Haave:
Taking Occam's Razor to GM to distill the probability of bankruptcy and or the value of GM shares, "What would you pay for the following cash flows?
$15 billion in cash, $3 billion in industrial and consumer finance earnings, then the obligation to invest a $90 billion pool of assets.
This pool must earn 9 percent. If it earns more, the you keep the difference. If it earns less you have to make up the difference.
"There are restrictions on how you can invest this pool. Presume probably one third must be fixed-income. Of the equity portion you are probably topped out at 25 percent international.
While you can probably do some hedge funds, it is probably on a broad scale where your performance is not likely to be greater than your average fund of funds.
"So, what would you pay for these cash flows? The market says $13 billion. Given the restrictions, one would be hard pressed to justify a long term expectation of greater than 7% earnings on the asset pool. Meaning, if everything stays the same, the value of GM is wildly negative.
This leads to a few thoughts:
1. At the current stock price, there is a significant bet being placed that the union will cave instead of allowing bankruptcy.
2. The presumed amount at which the union caves will be whatever combination of current wage concessions and benefit cut brings the present value of the cash flows to a slightly positive state.
3. Given the huge benefit cuts that will be necessary even to bring the present value of the cash flows to zero or a positive state, what are the chances that shareholders will have more than $13 billion of value left over?
Answer: "I wouldn't guess very high." And we agree, GM is the posterboy for top heavy (read overpopulated and overcompensated management) beheamoths which adhere to antiquated business models. There will be more sack-n-loot and number jockeying moves during what we estimate to be, a pre BK life span of 36 months.
From Rick Ackerman's Rick's Pick's an interesting analysis of GM’s bankruptcy prospects. It is the work of Gordon Haave. Our comments in italics:
The Devil can only view GM as a huge pension fund primed to go bust, and there’s no reason why Beelzebub will show any more kindness to auto workers than he has to airline employees.
With all the speculation about how Helicopter Ben might handle the recession that could scuttle GM (and Ford), few have observed that the U.S. is already hemorrhaging funny-money vouchers to prop up the airlines.
This is being done, not surreptitiously, or through the Bernanke-friendly provisions of the Monetary Control Act, but indirectly and in such a manner as to suggest that the bailout is just capitalism at work.
We see that the U.S. Pension Benefit Guaranty Corp. has made commitments well in excess of its capital, receiving airline shares in return. Perhaps this explains the latest run up in airline stocks? Things couldn't get any worse after 9/11, Iraq, Katrina & the Oil Price Shock. And it helps to have the BK laws and PBGC in bed with you.
Good thing at least one quasi-governmental investor still has faith in the airlines, since individual investors continue to treat their shares like toxic waste. Is Delta Airlines as good a risk as Chrysler was 25 years ago? How about GM? Before you leap to Kirk Kerkorian’s side, consider the logic of Mr. Haave:
Taking Occam's Razor to GM to distill the probability of bankruptcy and or the value of GM shares, "What would you pay for the following cash flows?
$15 billion in cash, $3 billion in industrial and consumer finance earnings, then the obligation to invest a $90 billion pool of assets.
This pool must earn 9 percent. If it earns more, the you keep the difference. If it earns less you have to make up the difference.
"There are restrictions on how you can invest this pool. Presume probably one third must be fixed-income. Of the equity portion you are probably topped out at 25 percent international.
While you can probably do some hedge funds, it is probably on a broad scale where your performance is not likely to be greater than your average fund of funds.
"So, what would you pay for these cash flows? The market says $13 billion. Given the restrictions, one would be hard pressed to justify a long term expectation of greater than 7% earnings on the asset pool. Meaning, if everything stays the same, the value of GM is wildly negative.
This leads to a few thoughts:
1. At the current stock price, there is a significant bet being placed that the union will cave instead of allowing bankruptcy.
2. The presumed amount at which the union caves will be whatever combination of current wage concessions and benefit cut brings the present value of the cash flows to a slightly positive state.
3. Given the huge benefit cuts that will be necessary even to bring the present value of the cash flows to zero or a positive state, what are the chances that shareholders will have more than $13 billion of value left over?
Answer: "I wouldn't guess very high." And we agree, GM is the posterboy for top heavy (read overpopulated and overcompensated management) beheamoths which adhere to antiquated business models. There will be more sack-n-loot and number jockeying moves during what we estimate to be, a pre BK life span of 36 months.
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