As GM losses deepen, bankruptcy fears grow

GM Chairman Rick Wagoner pressed Thursday to convince Washington to provide more aid as the company revealed a massive loss coupled with a warning that its auditors are likely to question the automaker's viability.

It was a further sign that the century-old automaker is teetering on bankruptcy, a scenario that General Motors Corp. is desperately trying to avoid.

Now Washington will have to decide whether it makes sense to loan more money to GM after the company reported an annual loss of $30.9 billion. Company executives met with the Obama administration's auto task force for about six hours, outlining the need for as much as $16.6 billion that it has been seeking -- in addition to the $13.4 billion already given.

Several industry analysts said Thursday's loss, while larger than predicted, was not a complete shock and only underscored the need for more federal assistance.

"The last thing that Washington needs is more proof that GM is doing poorly," said Aaron Bragman, an industry analyst with IHS Global Insight. "What Washington is looking for is proof that GM is on the right path toward recovery. It's really difficult to show that you're on that path when the path keeps getting swept away by the floods of recession."

The automaker faces tough political currents, though.

"It's not going to play well, and it won't play well in particular ... with the Republicans," said Sheldon Stone, a restructuring expert from Birmingham-based Amherst Partners. "I don't think Congress in general is going to have the stomach to continue to fund what looks like a black hole. I think they cannot avoid bankruptcy."

While things look bleak, several analysts see hope in recent statements by President Barack Obama pledging to help the industry and in recent meetings between industry leaders and the president's auto task force.

"What is happening is the awareness of how strategic this industry is and how significant it is if there were a major failure," said David Cole, chairman for the Center for Automotive Research.

Auditors questions expected

GM, however, said that its auditors were likely to formally question in the company's annual report whether it is a "going concern" -- in other words, whether it is able to continue its operations. The warning could indicate that GM might be forced to file for bankruptcy, a move it has long resisted.

"Going-concern opinions tend to trigger defaults that allow a whole lot of bad things to happen if people are inclined to do that," said Kimberly Rodriguez, a restructuring specialist from Grant Thornton. "The key here is the reaction from the stakeholders."

GM's 2008 loss is second only to 2007's loss of $38.7 billion, which was largely because of a noncash, tax issue. Excluding onetime charges, GM's loss last year would have been $16.8 billion.

This year's loss, however, was largely attributed to plummeting sales, a consequence of a global recession, which has consumers clamping down on spending, as well as a credit crisis, which has left many consumers who would like to buy a vehicle unable to get a loan.

Sales of GM vehicles in the United States, the automaker's largest market, dropped 22.7% last year. In all, the automaker's revenue for 2008 dropped to $149 billion, down from $180 billion in 2007.

GM said it ended 2008 with $14 billion in cash on hand, notable because the automaker has said its needs a minimum of $11 billion to $14 billion in cash to operate.

On an adjusted basis, GM burned through $19.2 billion in operating cash last year, including $5.2 billion in the final three months. That's compared with $2.4 billion in 2007.

GM Chief Financial Officer Ray Young said the company expects cash burn to drop to $14 billion in 2009.

"We're not pleased with a negative $14-billion cash flow burn. That's still a very, very sizable amount. But at the same time, we recognize that the industry conditions in '09 are going to remain fairly challenging," Young said. "We're not forecasting any heroic recovery."

Efraim Levy, an analyst with Standard & Poor's Equity Research, wrote in a note Thursday that GM could "very well" end up spending more than the $14 billion in operating cash this year.

"This quarter, in our view, just fills in the gap missing in the recently filed viability plan," Levy said. "It reinforces for us the notion that GM will need multibillion-dollar government assistance to continue as a going concern."

It is seeking as much as $16.6 billion more from the U.S. government and billions more from foreign governments for the automaker's non-U.S. operations.
Bankruptcy options

Meanwhile, GM continues to negotiate with bondholders and the UAW in an effort to reduce its debt as required by the terms of the government loans.

Without the threat of bankruptcy, however, some analysts have suggested that GM is at a disadvantage in its negotiations to reduce its debt with bondholders.

"Taking the bankruptcy option off the table diminishes the bargaining power of the companies and the government with the stakeholders," analyst Brian Johnson of Barclays Capital said in a note earlier this month.

Additional government support is a tough sale, said James Cashman, a professor at the University of Alabama with years of experience in the auto industry. GM's loss, Cashman said, would "force the debate ... for bankruptcy."

Joseph Phillippi, a longtime industry analyst, agreed that the sum of 2008's loss could make GM's efforts to get assistance even more difficult.

"You've got so many hawks. ... It's only going to give them more ammunition," against more government aid, he said.

GM, meanwhile, has argued against bankruptcy, saying such a move would cause damage to its sales and image.

Cole, chairman of the Center for Automotive Research, said no one was expecting GM to have good news Thursday.

"The big deal here is that you can't cost ... your way out of this problem. It's totally a revenue problem," Cole said. "As long as the market stays in the tank at the level it is, the industry is right on the edge of a cliff."

However, GM's loss was greater than expected. A survey of analysts by Bloomberg had predicted a loss of $26.83 per share, excluding onetime items. However, GM's loss per share was $29, excluding onetime charges.

Contact TIM HIGGINS at 313-222-8784 or thiggins@freepress.com. Staff writer Justin Hyde contributed to this report.