Life & Style | Motoring
Rescue deal threatens GM equity
General Motors Corporation's equity may be largely, if not entirely, wiped out as it complies with the restructuring targets laid out in the federal auto bailout, an analyst at Credit Suisse said, cutting his price target to $1 (Dh3.67) and his rating to "underperform."
- Reuters
- Published: 23:36 December 22, 2008
Detroit: General Motors Corporation's equity may be largely, if not entirely, wiped out as it complies with the restructuring targets laid out in the federal auto bailout, an analyst at Credit Suisse said, cutting his price target to $1 (Dh3.67) and his rating to "underperform."
GM shares were down about 7 per cent at $4.19 in trading before the bell yesterday.
"Over the next two months...it will become increasingly clear that the enormous sacrifice of value on the part of the union and bondholders will require the complete or near-complete elimination of the existing GM equity," analyst Christopher Ceraso wrote in a note titled Game Over for Existing Equity.
The US government on Friday came to the rescue of US automakers with $17.4 billion in emergency loans, some $13.4 billion of which will be made available in December and January, taken from a $700 billion Wall Street bailout fund originally designed to rescue struggling financial institutions.
The government attached a string of conditions to the three-year loans and set a deadline of March 31 for the automakers to prove they can restructure enough to ensure their survival or have the loans called back.
As part of the rescue, GM is required to reduce debt by two-thirds via debt-for-equity swaps, pay half of the contributions to a retiree health care trust using stock, make union workers' wages competitive with foreign automakers and eliminate the union jobs bank, which pays laid-off workers.
Hopeless case
"If GM and its stakeholders can navigate through a tricky set of negotiations, and all parties can agree to sacrifice value in a manner consistent with the targets laid out by the government, we still arrive at a discounted cash flow-derived equity value of less than one dollar per share," Ceraso said.
If the bondholders and unions cannot come to an agreement over the amount of value to be sacrificed, GM may still end up in bankruptcy court, Ceraso said.
Ceraso previously rated the stock "neutral" with a price target of $2.
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