Analyst: GM may need to boost cash

By LARRY RINGLER Tribune Chronicle
Slowing sales of its high profit-margin large vehicles, plus a weak U.S. economy, may force the giant automaker to raise more than $9 billion in cash in the next couple of years, an analyst said Wednesday.

Although such a financing would dilute current shareholders’ stake somewhat, it would be a prudent move, a local investment advisor said.

‘‘Once a company keeps borrowing and going into debt, it puts a strain on earnings and the shareholders, but I’d be more concerned about the strength of GM than a little dilution,’’ said Michael Creatore of Creatore Wealth Management Group in Boardman. ‘‘I think GM is being smart and cautious with current financial conditions.’’

Creatore said GM could raise cash by issuing longer-term bonds and refinancing costly debt instead of issuing stock.

‘‘They’re not in a cash crunch, but they are going through a cash drain,’’ he said.

In an investment note to clients, Lehman Brothers analyst Brian Johnson said GM will need to raise more than $9 billion over the next two years to refinance debt and make up expected cash losses in its North American auto business.

The automaker’s cash flow in its first quarter was in the red by $3.6 billion, and its readily available cash dipped to $23.9 billion at March 31 from $24.8 billion at Dec. 31.

GM Chief Financial Officer Ray Young on Tuesday said GM also had about $7 billion in available credit at March 31, Reuters reported. He said GM, though comfortable in its cash stockpile through 2008, could take action to raise funds and to cut costs more if the U.S. economic downturn worsens or drags on, the news service reported.

Creatore noted the company is battling a weak economy that’s cutting sales of its traditional cash cows — pickup trucks and large sport utility vehicles — as gasoline hits $4 a gallon. He said the company’s fixed costs, such as factories and contracts for workers and suppliers, stay the same, while sales of lower-priced cars don’t replace lost revenue.

‘‘They make a lot less money on the (Lordstown-built Chevrolet) Cobalt than on the Envoy and Enclave (SUVs),’’ he said.

GM won’t get much help from a sluggish economy the rest of this year and could face more trouble if the weakness continues into 2009, Creatore said. If sales continue to decline, the company could be pushed to make more cutbacks, such as plant closings and layoffs, he said.

The automaker also faces cash demands from $650 million in aid to parts supplier Delphi Corp., GM’s former division that’s struggling to reorganize in Chapter 11 bankruptcy, along with a $200 million contribution to American Axle & Manufacturing Holdings to help settle a three-month strike with the United Auto Workers.

In addition, it’s facing major capital investment to develop cutting-edge vehicles, such as the electric Volt car and to remake existing vehicle lines.



lringler@tribune-chronicle.com