With the filing of the Calpine chapter 11 case, the word “bankruptcy” is in the news again and it is increasingly being associated with the name “General Motors.” Prior posts on the risk of GM’s insolvency are here.
GM shares fell to their lowest level since October 1987 yesterday, eventually closing at $19.85, down almost 6% from the previous day’s closing price. In related news, Toyota Motor announced that it plans to produce a record 9.06 million cars next year, which is about the same as the 9.1 million cars and trucks that GM plans to make this year. Unfortunately for GM, Toyota will produce the same number of vehicles as GM while operating under far superior financial circumstances. Toyota’s $142 billion balance sheet reflects $84 billing in equity (with only a sixth of GM’s debt), while GM’s $480 balance sheet includes only $28 billion in equity. Just to put the icing on this very bad GM cake, the United Auto Workers union this week is preparing to send a letter to GM retirees informing them that GM faces a “serious risk of bankruptcy” if it doesn’t obtain relief from burdensome health care costs.

Meanwhile, this Business Week article provides a good overview of what can be expected if GM elects to reorganize under chapter 11. Although certainly not an inviting prospect, GM does not appear to have many other options. Absent attractive government financing, it is highly unlikely that a foreign competitor such as Toyota would want to upset its vastly superior financial condition and operating culture by acquiring an inefficient behomoth with $300 billion in debt. And even with such government financing, a merger partner probably not want to take on the GM acquisition without cleaning up its balance sheet under a chapter 11 plan. Despite its poor overall financial condition, GM does have a reasonably strong liquidity position, so that puts the company in a decent financial position for launching a chapter 11 case.
Nevertheless, a GM bankruptcy involves enormous risk. Consumers are understandably relunctant to make a long-term purchase of an important asset from a company that is mired in bankruptcy. Stated simply, can the GM brand survive bankruptcy? Stay tuned.