GM's Move to Tap Credit Line
May Intensify Worries

A Large Drawdown Focuses Concern on Cash Supply

JOHN D. STOLL / Wall Street Journal 22sep2008

General Motors Corp.'s move to draw $3.5 billion from an existing credit line could intensify investor concerns about the adequacy of the auto maker's cash supply, even as it takes some immediate pressure off the company's plans to tap the volatile credit markets.

On Friday, GM said it intends to draw the cash from a $4.5 billion credit facility it arranged in 2006 with banks including J.P. Morgan Chase & Co. and Citigroup Inc.

People familiar with the matter said GM turned to the credit line because it was growing increasingly concerned about the health of its banks amid the current crisis on Wall Street. It viewed securing the cash now as a "prudent" liquidity play, said GM Treasurer Walter Borst.

The move also reflects GM's battle to ensure its own survival. Without the fresh injection of $3.5 billion, GM would have been more likely to run into trouble meeting its financial obligations by the end of the year.

"Given the tremendous uncertainty in the financial markets and the position GM is in, they're better off trying to tap their lines now, rather than later and finding they can't," said Joe Phillippi, an analyst at AutoTrends Consulting Inc. in Short Hills, N.J. But, he added, it could be a sign GM thinks the end of 2008 and beginning of 2009 will be tougher than initially expected.

GM's cash position has been dwindling in recent quarters. The auto maker says it needs between $11 billion and $14 billion on hand to fund day-to-day operations. As of the end of June, GM had $21 billion available, excluding $5 billion in untapped credit lines. Given the about $1.2 billion-a-month rate at which GM has been burning through cash this year, Wall Street has begun to worry about its liquidity.

In July, GM laid out a plan to cut costs by $10 billion and raise $5 billion in cash through a variety of measures, such as asset sales and new, secured financing. That plan was supposed to keep the company afloat through the end of 2009.

But GM has run into trouble meeting those goals. Banks have proved unwilling to help the company raise the $2 billion to $3 billion in financing that is a key part of its plan. GM had hoped credit markets would loosen up after Labor Day. Instead, the chaos on Wall Street has made credit all but unavailable.

GM generally has regarded tapping its credit lines as something of a last resort. In the past, it has occasionally drawn limited sums from them, but executives said they did so simply to test the mechanism put in place, and not because GM needed the funds.

In June, Chief Operating Officer Frederick "Fritz" Henderson said GM's credit lines were considered "dry powder," meaning they would be held in reserve.

GM has been hit hard this year as the nation's weak housing market and the slumping economy have damped auto sales, and high gasoline prices have discouraged Americans from buying the big trucks and sport-utility vehicles that account for a large chunk of its North American revenue.

For the second quarter, GM reported a loss of $15.5 billion, and the third quarter is shaping up to be another tough one. Because of slowing sales, GM had to extend its summer shutdown several weeks at many of its truck plants, leaving some idle for most of the third quarter, typically its weakest quarter in terms of cash flow. The extended shutdowns are expected to take a big toll on revenue because auto makers book sales when they ship vehicles from their plants.

GM has used up more than $8 billion in third quarters dating back to 2005.

source: 22sep2008