When far smaller companies find themselves mentioned in the same sentence as “bankruptcy”, it can start a death spiral as creditors grow anxious, tighten terms and aggravate the cash squeeze.
General Motors is vast and will not run out of liquidity any time soon. Its cash pile stood at $19bn at the end of September. It would take quite a few horrible quarters – the last one saw a cash outflow from operations of $2.2bn – to plough through that. There are also assets to sell, such as GM’s crown jewel, GMAC.
Furthermore, GM’s cash outflows should lessen, thanks to savings from the recent deal hammered out with its unions. Coupled with any signs of a longed-for recovery in automotive results – possibly driven by better models – this might be enough to inflict some pain on GM’s short sellers. It is unlikely, though, that Kirk Kekorian’s positive bet on GM’s shares will be vindicated soon.
There is one wild card, however, and that is if GM supplier, Delphi, currently in Chapter 11, fails to reach a settlement with unions. If there were a breakdown that actually triggered strikes, the disruption to GM’s production could be calamitous. The heavy high-fixed costs inherent in the automotive business means that the cash impact would be huge. Sanford Bernstein reckons the cash burn of a seven-week strike in 1998 was nearly $5bn. An extended three-month strike might be enough to drain nearly all of GM’s cash. Of course, that prospect should also terrify the unions.
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