In The Days

• Source: Bloomberg
• News Date: Greg Bensinger and Jeff Green, 8/2/08

Aug. 1 (Bloomberg) — General Motors Corp. reported a second-quarter loss of $15.5 billion, the third biggest in its 100-year history, because of plunging U.S. sales and the declining value of truck leases. The shares fell as much as 11 percent.

“…upon the earth distress of nations, with perplexity…”
—Luke 21:25

“But he, knowing their thoughts, said unto them, Every kingdom divided against itself is brought to desolation; and a house divided against a house falleth.”
—Luke11:17

he deficit of $27.33 a share compares with a profit of $891 million, or $1.56, a year earlier. Excluding costs GM considers one-time, the per-share loss was 4 times bigger than analysts projected. Labor strikes contributed to a $9.9 billion drop in North American revenue, and sales worldwide tumbled 18 percent to $38.2 billion.

The results step up pressure on Chief Executive Officer Rick Wagoner, 55, to show he can revive the largest U.S. automaker. Wagoner, in his ninth year as CEO, has posted $69.8 billion in losses since 2004 and is trying to raise as much as $17 billion in cash while speeding the development of fuel-saving cars to replace the sport-utility vehicles being shunned by U.S. buyers.

“They really need those external fund-raising measures to get through to 2010,” said Brian Johnson, a Chicago-based Lehman Brothers analyst, in a Bloomberg Television interview. “We cannot count on an economic rebound.”

GM’s fourth straight quarterly loss comes as a weakened U.S. economy and soaring gasoline prices drag U.S. auto sales to 15- year lows. Demand for GM products dropped 16 percent through June, and analysts expect the automaker to report a decline in that range when July sales are released today.

“The second quarter has been one of the fastest-changing quarters I’ve ever seen” in terms of consumers switching from pickup trucks and SUVs to cars and small SUVs, Chief Financial Officer Ray Young told reporters in Detroit today.

Nissan, BMW Decline

The soft U.S. market is buffeting automakers worldwide. Ford Motor Co., the second-biggest U.S. car company behind GM, posted a record quarterly loss of $8.7 billion last week. Tokyo-based Nissan Motor Co. reported a 43 percent decline in profit today, while Germany’s Bayerische Motoren Werke AG said earnings slid by a third.

GM burned through $3.6 billion in the quarter and said today its supply of cash, marketable securities and other funds available fell to $21 billion on June 30, from $23.9 billion at the end of the first quarter.

GM fell 74 cents, or 6.7 percent, to $10.33 at 10.37 a.m. in New York Stock Exchange composite trading, after dropping to $9.90 earlier. The shares plunged 56 percent this year through yesterday, for the worst decline among the 30 companies in the Dow Jones Industrial Average.

Residual Values

The Detroit-based automaker reported a $2 billion charge in the quarter because of the decline in residual values for leased vehicles.

Excluding costs such as a charge for an attrition program and an adjustment to its reserve for Delphi Corp. considered by GM to be one-time expenses, the loss was $6.3 billion, or $11.21 a share. On that basis, the company was forecast to lose $2.40 a share, the average of 12 analysts surveyed by Bloomberg.

GM was profitable in both its European and Latin America- Africa-Middle East region, posting profits of $20 million and $445 million, respectively. The automaker’s loss grew to $9.3 billion in North America, from a deficit of $88 million. In its Asia-Pacific region, GM had a loss of $163 million after a profit of $280 million a year earlier.

GMAC

About $1.2 billion of GM’s loss was related to the automaker’s partly owned GMAC finance unit.

GMAC yesterday reported a $716 million pretax expense for residual-value losses as part of a $2.5 billion second-quarter net loss. GMAC said it was able to reduce that cost because of $1.55 billion that the finance and mortgage company expects to receive from GM through risk-sharing and other agreements and $350 million in payments already made.

GMAC said it has $30 billion in North American leases. That includes $12 billion in SUVs and $6 billion in other trucks, vehicle types that are losing sales because of $4 gasoline.

The residual value is what a vehicle is worth when a customer returns it at the end of a lease. The lender’s residual losses average $11,000 a vehicle for GM models, GMAC Chief Financial Officer Robert Hull said yesterday.

The cost of protecting GM debt from default rose. The upfront cost of credit-default swaps on GM rose 3.5 percentage points to 45.5 percentage points, according to broker Phoenix Partners Group. as of 10:23 a.m. in New York. That means it costs $4.55 million initially and $500,000 a year to protect $10 million of bonds from default for five years.

Swaps

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country, or company, fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

GM’s 8.375 percent bond due July 2033 fell 1 cent on the dollar to 48 cents on the dollar, according to Trace, the bond- price reporting system of the Financial Industry Regulary Authority. The yield rose to 17.7 percent.

Standard & Poor’s yesterday cut GM’s credit rating one level to B-, or six steps below investment grade, because falling U.S. sales are causing the automaker to use more cash than anticipated. With the U.S. auto slump expected to carry into next year, GM faces a risk of further cuts, said Robert Schulz, an S&P debt analyst. GM had the highest rating, AAA, from 1953 until 1981.

Largest Losses

GM in 2007 reported its largest annual loss, $38.7 billion, after a tax-accounting change. The biggest quarterly loss, $39 billion in last year’s third quarter, topped a $21 billion deficit for an accounting change in the first quarter of 1992.

The automaker telegraphed today’s losses July 15 when it outlined plans to increase liquidity by as much as $17 billion by the end of next year by trimming salary payroll costs 20 percent, delaying some products and scrapping a 25-cent-a-share quarterly dividend.

Eliminating the dividend and an unspecified number of salaried jobs will help GM save $10 billion a year. GM plans to generate $4 billion to $7 billion by selling as yet unidentified assets and borrowing from banks.

Wagoner’s Scenario

The increased cash means the automaker will have enough to operate should U.S. sales fall to 14 million cars and trucks this year and next, lower than analysts expect, Wagoner told employees last month. GM also figures on oil costing $130 to $150 a barrel, compared with $124 currently.

GM has said the three-month walkout at former subsidiary American Axle & Manufacturing Holdings Inc. and a smaller strike at two vehicle plants cut first-half pretax earnings by $2.8 billion.

July auto sales, to be released after noon New York time, will match June’s annual selling rate of 13.6 million vehicles, according to a Bloomberg survey of 40 analysts and economists. That was the lowest level since 1993, when the industry was emerging from a recession.

“You can kind of look at July as a preview for the rest of the year,” S&P’s Schulz said. “We just expect sales to be weak.”