Report notes ‘substantial doubt’ at prospects
The specter of a General Motors Corp. bankruptcy was raised Thursday by the automaker’s own auditors, which said there was “substantial doubt” about the company’s ability to continue operating.
Although the warning was not unexpected – GM said last week that such a judgment was likely – the confirmation of that prospect threw yet another spotlight on the struggling automaker’s dire position. GM lost $30.9 billion in 2008 and burned through $19.2 billion in cash, leading it to borrow $13.4 billion from the federal government and last month to request $16.6 billion more in taxpayer-funded support.
GM has said that without more government cash infusions, it will not be able to continue operations. It also has requested aid from other countries where it operates, including Canada, Germany and Brazil.
The auditor’s warning, known as a “going concern” judgment, was included by Deloitte & Touche in the company’s annual report, filed Thursday with the Securities and Exchange Commission.
According to the filing, the auditor felt that GM’s “recurring losses from operations, stockholders’ deficits and inability to generate sufficient cash flow to meet our obligations and sustain our operations raises substantial doubt about (the company’s) ability to continue as a going concern.”
Auditors with doubts about a company’s viability are required to file such opinions; the decision can cause a company to be in violation of loan covenants or result in a debt rating downgrade.
Both can significantly raise the cost of doing business, which has led some financial experts to conclude that going-concern warnings are self-fulfilling prophesies: by issuing them, a company’s costs almost certainly will escalate, further pushing it down the road to insolvency.
In addition to the federal loans, GM has a $4.5 billion revolving line of credit, a $1.5 billion term loan and a $125 million secured financing line. The terms of those loans allow for alterations in the event of a going-concern notice, but GM said Tuesday that it had received waivers from all its lenders on applicable clauses.
“A company which has borrowed $13.4 billion and has asked for billions more around the world is obviously in trouble,” said Harlan Platt, an expert on corporate finance at Northeastern University.
GM has been battered by the worst sales downturn in the auto industry in decades. For all of last year, GM’s U.S. sales volume declined 23 percent, and through the first two months of this year, it sold 51 percent fewer cars and light trucks in the United States than a year earlier.
Chrysler, which also received government financing and is seeking $5 billion more, has seen its U.S. sales fall 49.1 percent so far this year.
Under the terms of its federal loans, GM is attempting to rework an agreement with the United Auto Workers union over payments to a trust to fund retiree health care, as well as to reduce its unsecured debt by two-thirds. In recent weeks, GM has said it was able to gain new concessions on labor costs from the union, but the company has not announced any progress on retiree health care or in negotiations with bondholders.
The White House has assembled a team of advisers, including Treasury Secretary Timothy Geithner, to oversee the auto-industry restructuring, and the president has emphasized on several occasions his commitment to saving the U.S. auto industry.
“We are committed to the goal of a retooled, reimagined auto industry that can compete and win,” President Barack Obama said last month.
But with sales last month hitting the lowest level since 1981, there are significant concerns about the ability of any automaker – even those with healthy balance sheets – to operate in this environment.
Toyota Motor Corp., for example, expects to soon report its first annual net loss in 59 years, despite being the top-selling automaker in the world.
GM’s turnaround plan, submitted to the Treasury Department last month, is based on a level of sales significantly higher than that seen over the past two months.
“There is no assurance that the global automobile market will recover or that it will not suffer a significant further downturn,” GM said in its annual filing.
Also in its report, the company said Chairman and Chief Executive Officer Rick Wagoner received compensation valued at $14.9 million last year. Of that, $11.9 million was in stock and options whose value has since plummeted to less than $685,000.
The company said in its restructuring plan that Wagoner would take a salary of $1 in 2009.
GM shares fell 34 cents, or 15.5 percent, to $1.86 Thursday.
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