GM investors bet US' lifeline won't be enough

General Motors Corp Chief Executive Officer Rick Wagoner said the biggest US automaker got “what we asked for” with $9.4 billion in US loans over the next 24 days. Investors bet that it’s not enough.

GM tumbled the most in more than a month on Monday in New York trading, while credit-default swaps on the company’s bonds jumped 2 percentage points in a sign of increasing concern that the Bush administration’s bailout may end in a default.

The stock-price slide all but erased the 23 per cent gain on December 19, when Detroit-based GM received a federal aid package to help it stay in business until March 31 while crafting a plan to shut plants, shed brands and reduce debt.

There is a “high” likelihood of a GM bankruptcy, Standard & Poor’s said on Monday in reducing the rating on the company’s unsecured debt to C, or 11 grades below investment quality. Robert Schulz, an S&P analyst in New York, said creditors can expect “negligible recovery” should the automaker default.

“It’s almost impossible for a management that invested in the assets, that hired the people, that put forth the strategy, to change so dramatically in such a short period of time,” Edward Altman, a New York University finance professor who created the Z-score formula to measure bankruptcy risk, said in a Bloomberg Television interview.

GM has slashed output and won union concessions since saying November 7 it may run out of operating cash by year’s end. The automaker said it would need as much as $18 billion in aid or face a possible bankruptcy.

President George W Bush promised $4 billion by December 29 and an additional $5.4 billion by January 16, enough for GM to survive at least until President-elect Barack Obama takes office on January 20. Should Congress release more funds from the Troubled Asset Relief programme, GM will receive $4 billion more by February 17.

The loans are “going to get us through this rocky period,” Wagoner told Detroit radio station WJR on Monday. “The funding that we received is what we asked for.”

He spoke before GM fell 97 cents, or 22 per cent, to $3.52, the biggest decline since November 10. The drop was the most among the 30 stocks on the Dow Jones Industrial Average. The shares traded in Europe declined a further 4 per cent to $3.38 as of 10:42 am on Tuesday in Frankfurt.

Shareholders may be “wiped out” by the restructuring needed for the bailout, analyst Christopher Ceraso of Credit Suisse AG said on Monday. He cut his rating to “underperform” from “neutral” and slashed his target price in half to $1.

The upfront price on GM credit-default swaps rose 2 percentage points on Monday to 81 per cent, according to CMA Datavision. That’s in addition to 5 per cent a year, meaning it would cost $8.1 million initially and $500,000 a year to protect $10 million of GM bonds for five years.

GM’s 7.7 per cent note due April 2016 lost 2.1 cents to 16 cents on the dollar, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The yield was 56 per cent.

Wagoner said last week that having secured the federal loans, GM’s biggest challenges would be working with debt holders on debt-for-equity exchanges and negotiating cost-saving agreements with unions.

He told WJR on Monday that he had “done a significant amount of thinking” about a new plan to keep the US funds, though “it’s fair to say a lot of that work will start up in earnest at the beginning of next year.”

United Auto Workers spokesman Roger Kerson didn’t return calls on Monday seeking comment. The Canadian and Ontario governments also pledged GM C$3 billion ($2.45 billion) in aid last week.

GM is struggling with a 22 per cent plunge in US sales this year, worse than the 16 per cent industrywide slide, and is considering paring its Pontiac lineup to one model from six and is trying to sell its Saab and Hummer franchises.

“Every aspect of the business is being examined and re- examined and re-examined,” Wagoner said in the radio interview. “If we keep doing that, we can find ways to squeak out some more costs that aren’t essential for customers and do things differently.”

“It’s not without some pain,” he said, without providing details.

That’s being optimistic, said Credit Suisse’s Ceraso, who is based in New York. The “best-case scenario” may be the “complete or near-complete elimination” of GM’s equity value, assuming that bondholders and the UAW agree to concessions under the bailout plan, he said.

Should those parties not reach an accord, “GM may still end up in bankruptcy court,” he said.