Why Isn’t Ford Bankrupt?

The Terrible Auto Market With the success of the GM IPO, we may be tempted to forget the terrible decade the U.S. auto industry has just completed.  Car sales steadily declined from 2000 through 2007, then collapsed in 2008 and 2009 to a level not seen since 1951.  Truck sales, which saw dramatic growth in the 1990s and finally eclipsed car sales in 1999, saw some growth in the early 2000s, but also dramatically retreated in the 2007-09 recession. The “big 3” U.S. auto makers also suffered market share declines in this period, from a combined 65% of the U.S. market in 2000, to 53% in 2006, to 44% in 2009.  It should be no surprise that GM and Chrysler filed for bankruptcy in 2009.  The real question is: Why didn’t Ford go bankrupt? Why Didn’t Ford Go Bankrupt? By 2006, it was clear to the big 3 auto makers that there was a problem.  Ford’s sales and net income had been flat for many years.  Ford, like the other auto makers, began a major restructuring to reduce capacity, cut costs, and accelerate product development.  The key to Ford’s success, however, was in aligning its business and financial strategies. How did the Ford finance team respond to declining sales and the company’s new operational restructuring?  By borrowing over $12 billion, increasing the company’s auto sector debt (excluding the financial services business) by 66% from $17.9 billion to $30.0 billion.  Ford borrowed this money at the peak of the credit bubble, right before the recession hit and vehicle sales dropped by over 1/3.  Why isn’t Ford bankrupt? Why the New...

General Motors. But wait! There’s less…

Credit and equity often seem like different dimensions in the analytical universe, but they often intersect in compelling ways. Take General Motors (GM) and its plan to issue equity for example. There’s a case to be made for GM’s having a lot of equity value. To make it, we also have to look at Ford. For both companies, 2009 was a big improvement over 2008. But Ford did better, generating $11.0 billion in EBITDA, while GM had an EBITDA loss of $9.9 billion. And Ford has publicly traded common shares and an equity market value of about $42 billion, while GM has neither. Let’s make two simplifying assumptions. One is that, in the absence of forecasts, we can use last year’s financials to value Ford and GM. The other is that over time GM’s performance will match Ford’s. Ford’s enterprise value is the sum of its equity market value, minority interest, and debt net of cash: $84.9 billion. Its value multiple is its enterprise value divided by EBITDA:  7.7x. Its EBITDA margin is EBITDA divided by sales: 9.3%. If we apply the same margin to GM’s 2009 revenues, we get an estimate of its longer-term earning power: $9.7 billion in EBITDA. If we apply the same multiple to GM, we get its enterprise value: $75.1 billion. GM’s equity value is its enterprise value less minority interest and debt net of cash: $82.1 billion. GM’s equity value is higher than its enterprise value because GM’s cash reserves exceed its debt. But that includes only the debt GM carries on its balance sheet. GM has $37.0 billion in unfunded benefit obligations...

More on General Motor’s Predicament

How did General Motor’s run through so much liquidity so fast? Static measures like cash and liquidity don’t really give us the full answer. We need a more dynamic view of what’s driving GM’s liquidity; something that focuses on uses and sources instead.   Here’s a table that shows where GM has been using and sourcing its liquidity for the nine months ending in September of this year.   Cash income has been the biggest use of liquidity, caused by the steep drop in vehicle sales that began earlier this year. Working capital has been a use largely because of decreasing accounts payable – a sign that suppliers are cutting back on the credit they give GM. Capital spending is another major use, as the company invests in new models. Credit market conditions forced GM to pay down much of its short-term debt, draining away even more liquidity.   GM met those demands for liquidity through liquidating assets, mainly by selling marketable securities and letting its portfolio of vehicle leases run off. The next biggest source was borrowing under its committed bank lines. But the most important source of liquidity by far was drawing on cash reserves.   GM found the sources it needed to survive, but only by consuming crucial liquidity reserves. That’s not sustainable. As of September 30, 2008, the company had only $7.2 billion in operating lease assets, $300 million in marketable securities, $16.0 billion in cash and equivalents, and $100 million in unused bank lines – at best enough last another nine months.   So it seems GM has been telling the truth. It really...

General Motors’ Predicament

After asking for $18 billion, General Motors is getting a $10 billion loan from the U.S. Government. They claim they’re running out of liquidity and they need the funds to survive through 2009. Are they right? Or is this just financial incompetence taking advantage of Congressional insecurity? There’s no doubt GM has been using up its supply of cash. They’ve run through almost $9 billion in the first nine months of this year. That’s a cash burn rate of $32 million a day. But cash doesn’t tell the full story. Liquidity is more than cash. It includes access to readily available credit, like lines of credit from banks that have made a legal commitment to lend. GM began the year with $5.9 billion in committed bank lines, nearly all of which was unused. But by the end of September, the company had borrowed almost $5.8 billion under those lines, leaving only $114 million available to meet liquidity needs. If we measure liquidity as cash plus un-borrowed, committed lines of credit, GM’s problems look even worse. GM has consumed more than $14 billion in liquidity through September, a liquidity burn rate of $52 million a day and $4.7 billion a quarter. By March of next year, liquidity will be down to only $4.1 billion, according to the projections GM gave Congress. With hardly any credit available from the banks or the debt markets, it looks like GM is right. They really will run out of liquidity before the end of June...