GM Fattens Credit Line
General Motors Company (GM) succeeded in near doubling its credit facility of $5 billion in a bid to strengthen its cash reserve, as planned. The automaker acquired $11 billion in new credit lines from 35 financial institutions in 14 countries.
The new credit facility includes a three-year $5.5 billion and five-year $5.5 billion lines, replacing the existing $5 billion line that was supposed to expire in 2015. It boosted the company’s available cash and credit to $42 billion.
Both Moody Investors Service – the credit-rating arm of Moody’s Corp. (MCO), and Standard & Poor’s have assigned investment-grade rating to the credit line. However, the overall corporate credit ratings of “BB+” (highest junk rating) by S&P and “Ba1” (one notch below investment grade) by Moody’s are kept at the same level.
GM did not specify how it would utilize its fattening credit line. However, it can be speculated that the company will mostly use the money for buying back stock from the U.S. Treasury (UST) in an effort to shed its “Government Motors” tag gradually.
Apart from the stock buyback, a portion of the credit line can be diverted to save the company’s ailing Opel operation in Europe, which has lost $747 million last year and further expects to lose more than $1 billion in 2012 due to waning car sales, high fixed costs and excess production capacity.
GM filed for bankruptcy in mid-2009. Post bankruptcy, the U.S. government acquired 61% stake in GM in exchange for a bailout loan of $49.5 billion. However, after several repayments amounting to $23.1 billion, the UST was left with 500 million shares of GM, which is equivalent to 26.5% stake in the company.
In order to recoup its remaining $26.4 billion loan to the automaker, the UST would need to sell its remaining shares of GM at nearly $53 each. However, the sad news is that the current price of GM is not even close and the government may need to wait for a long time to get its money back. Currently, shares of GM are hovering around $25, less than half of what is needed.
Last week, GM posted a 9.7% fall in earnings to 93 cents per share (excluding special items) in the third quarter of the year from $1.03 in the corresponding quarter a year ago. However, earnings per share in the quarter far exceeded the Zacks Consensus Estimate of 61 cents.
Total profit ebbed 5.9% to $1.6 billion from $1.7 billion a year go. The decline in profit was attributable to lower profits from North America and increased loss in Europe.
Revenues in the quarter grew 2.5% to $37.6 billion, surpassing the Zacks Consensus Estimate of $36.3 billion. Worldwide sales volume inched up 1.6% to 2.3 million units from 2.2 million units a year ago. However, total market share declined to 11.6% from 12.1% in the third quarter of 2011.
Operating income fell 11.2% to $1.6 billion from $1.8 billion a year ago. However, adjusted earnings before interest and tax rose 4.5% to $2.3 billion from $2.2 billion a year ago.
GM is a leading global automotive company. The company has presence in almost 120 countries and has facilities located in 31 countries. Despite its enormous size, the company currently retains a Zacks #3 Rank on its stock, which translates to a short-term rating of Hold, due to its significant exposure in troubled Europe and the global economic weakness.
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