Detroit automakers have enough money to avoid a bailout


Jeremy Kennedy, a Ford employee, secures the engine and transmission to the subframe of a new 2020 Explorer at Chicago Assembly Plant.


Even during the Great Recession and the bankruptcies of General Motors and Chrysler, the auto industry did not stop like during the coronavirus pandemic.

American automakers lose billions of dollars every month, the majority of Americans factories have closed since March and dealer showrooms have closed or are operating on a limited basis.

“We are going through an unprecedented period due to this pandemic,” DG CFO Dhivya Suryadevara told investors on Wednesday.

No one could have prepared for Covid-19, but Detroit automakers, including Ford Motor and Fiat Chrysler, weather the storm not to mention bankruptcies or the need for the same level of assistance as the airline industry. just received. This is a stark contrast between 2008 and 2009.


“The automakers themselves are in a slightly different shape. They have learned the lesson of how we need to improve the bottom line,” said Mark Wakefield, managing director and global co-leader in automotive and industrial practice at AlixPartners, which led the restructuring of GM into bankruptcy.

Much of the optimism is the result of the Great Recession. Meanwhile, Detroit automakers have been forced to lose billions of dollars in capital and structural costs. Since then, leaders such as GM’s CEO and president, Mary Barra, have made it their mission to fortify the balance sheet for the next recession, without knowing when or how it would happen.

Money matters more than anything else. Money is survival.

Michael Ramsey

CIO Analyst at Gartner

These efforts have resulted in tens of billions of dollars in available cash, less leverage and more flexible union contracts for vehicle production, saving money when factories are idle. , as is currently the case.

Morgan Stanley performed a “closing analysis” earlier this year which gave him “the confidence” that GM, Ford and others “can largely avoid the fate that many companies experienced in 2008/2009”, Analyst Adam Jonas said in a note to investors.

Drawdown on credit lines

To increase liquidity, the three automakers have collectively withdrawn about $ 45 billion from credit lines to ensure they have enough cash to survive in the next few quarters without large production, if any. Each of the automakers said they had enough cash to make it at least the fourth quarter without income if necessary.

It does not seem to be the case. The Governor of Michigan announced Thursday that state-owned automakers may resume operations this week. The three Detroit automakers plan to start restarting vehicle production in North America next Monday – but with strict safety rules to protect employees from an epidemic. Some support operations are expected to reopen this week.

Depending on the duration of the pandemic and the impact on sales in the United States, the auto industry could push for some sort of stimulus package to increase consumer demand, such as the $ 3 billion “Cash for Clunkers” program. dollars in 2009, which offered up to $ 4,500 for trade. ins towards the purchase of a new vehicle.

Frames for each of the Detroit automakers backed such a program before a bipartisan group of lawmakers urging American leaders to include the US auto industry in the next stimulus spending cycle.

Certainly Wall Street and industry analysts are watch attentively the growing debt of car manufacturers as well as the risk that consumers will fall behind on payments as unemployment rates soar to 14.7% in April. Used car prices and non-rental fleets could also face an influx of impairments.

GM prepared

GM was ahead of the curve to prepare for a slowdown. He left unprofitable markets like Europe and, in November 2018, announced plans to cut thousands of jobs and close factories as part of a $ 6 billion savings plan up to in 2020, which remains on track.

“All I know is that we are one day closer,” Barra said on November 1, 2018, weeks before the announced cuts, at the New York Times DealBook conference on a possible recession.

GM’s efforts are now paying off. The automaker last week reported first quarter earnings of $ 294 million despite the coronavirus pandemic.

The automaker also said the US industry only needs to sell 10 to 11 million vehicles in North America a year to break even, in line with its sales during the Great Recession. Sales in the United States in recent years have varied from approximately 15 to 17.5 million cars and trucks per year.

Joseph Spak of RBC Capital said GM “had done better than the others” while Dan Levy of Credit Suisse said all automakers “have argued for multiple revaluations in recent years GM is by far the most important case. “

GM’s first quarter earnings compared to losses of $ 2 billion for Ford and $ 1.8 billion for Fiat Chrysler.

The absolute priority of a car manufacturer is simple: survive. Do whatever it takes to spend the next one or two quarters.

Adam jonas

Morgan Stanley Analyst

GMentered the crisis from a position of strength, and our first quarter results demonstrate this and the discipline with which we have run the business, ”said Suryadevara.

Debt-to-profit ratios, which measure corporate debt levels, show how GM and Ford have strengthened their balance sheets since the Great recession. On an adjusted pretax basis, GM lost $ 14.74 billion in 2008, giving it a negative pre-tax debt-to-profit ratio. Last year it was 1.2, which means its debt was 1.2 times its annual profit, according to Fitch Ratings.

Ford’s debt-to-profit ratio was 14.1 in 2008 and 1.4 in 2019. Anything below 2 is considered a healthy ratio for the automotive industry, which requires a lot of capital.

“The two companies entered this downturn in a significantly stronger financial situation, I mean a much stronger financial position than what we saw entering the last downturn,” said Stephen Brown, senior director at Fitch Ratings who covers GM and Ford.

Fitch estimates that Ford’s cash consumption for the year will be approximately $ 8.5 billion as long as North American production resumes in mid-May. GM is expected to spend less than $ 3 billion in cash, according to the credit rating company.

Together, Detroit automakers spent about $ 8.6 billion in the first quarter, led by Fiat Chrysler at $ 5.5 billion and Ford at $ 2.2 billion. GM spent $ 903 million in cash during the quarter, of which $ 600 million was related to the coronavirus.

Ford last month warned investors that adjusted pre-tax losses are expected to reach $ 5 billion in the second quarter, which is expected to be the worst quarter in terms of impact on the coronavirus industry as a whole.

“Money matters”

According to Jonas of Morgan Stanley, companies that can get through the crisis without diluting existing stocks by issuing more equity or permanently altering their operations “can benefit from significant opportunities”. This is one of the reasons the company has improved its outlook on American automobiles and shared mobility, including Uber and Lyft, to become cautious after more than five years.

“The top priority of an auto company right now is simple: survive,” he writes. “Do whatever it takes to get through the next one or two quarters.”

Each of the Detroit automakers cut executive compensation and announced deferred compensation for employees, amid other actions to preserve liquidity and avoid laying off employees. GM and Ford have also suspended their quarterly dividends.

GM had $ 33.4 billion in available cash to end the quarter. This includes cash, cash equivalents, negotiable debt securities and funds available under the credit facilities for its automotive operations. That’s slightly down from $ 37.2 billion at the end of last year, but much better than the $ 14 billion it had in 2008.

In addition to withdrawing $ 16 billion in credit in March, GM revealed last month that it had signed a $ 1.95 billion, 364-day revolving credit agreement for the exclusive use of GM Financial, the auto loan subsidiary. of the society. The subsidiary held $ 23.9 billion in liquid assets at the end of the first quarter, including cash and available credit.

GM on Thursday too evaluated three sets of senior unsecured notes for a total of $ 4 billion and announced plans to establish a new $ 2 billion line of credit. The company had auto debt of $ 30.3 billion to end the first quarter.

“Money matters more than anything else. Money is survival,” said Michael Ramsey, analyst vice president of Gartner’s CIO research group, in a blog article published this month. “Profitability, earnings per share, the potential for revenue growth and other important parameters in a growing economy have no meaning at the moment.”

With so much uncertainty, analysts were somewhat reluctant to downgrade automakers to add debt and withdraw credit facilities. They considered it more important for businesses to have cash to keep paying the bills than negative.

An employee uses a flash grinder to smooth the metal frame of a sport utility vehicle (SUV) on the production line of the General Motors Co. (GM) assembly plant in Arlington, Texas.

Matthew Busch | Bloomberg | Getty Images

Ford CFO Tim Stone said last month the company had $ 35 billion in cash as of April 24, after paying its suppliers. He said the amount was enough to allow the company to end the year without any US production if that happened.

The company took $ 15.4 billion in March from two existing lines of credit. Ford said on April 17 that it had also sold approximately $ 8 billion in bonds. Ford’s debt has been downgraded to junk status and it pays significantly higher yields on this new debt, between 8.50% and 9.625%.

GM, in comparison, remains top quality and pays between around 5.4% and 7% on its new bond issues.

Ford had $ 35.4 billion in cash for its auto operations at the end of last year. This includes cash and total committed committed lines of credit available. This compares to $ 24 billion in 2008. Ford Credit, its financial arm, had $ 28.3 billion in cash at the end of the first quarter.

Fiat Chrysler said it had about $ 20.2 billion (18.6 billion euros) of cash available at the end of the first quarter. It also finalized an emergency credit facility of around $ 3.8 billion (3.5 billion euros) last month. Unlike its Detroit rivals, the Italian-American automaker doesn’t have a captive finance company, which can be a good thing during a recession when borrowers fall behind on car payments.

Car financing concerns?

Analysts and investors are monitoring default rates, particularly in subprime loans, as well as the prices of used cars and the expected influx of non-rental vehicles that may need to be written down. All of this helped pull automakers to the brink of collapse during the Great Recession.

President Donald Trump, center, speaks while Jim Hackett, President and CEO of Ford Motor Co., left to right, Larry Kudlow, director of the US National Economic Council listen during a meeting with Auto executives in the Roosevelt Hall of the White House in Washington, DC, the United States, on Friday, May 11, 2018.

Alex Edelman | Bloomberg | Getty Images

No one in the industry or in business is predicting anything so bad now, although there are signs of concern.

Ford Credit’s earnings decreased $ 771 million in the first quarter to $ 30 million due to “increased reserves for credit losses, lower value of non-leased vehicles on hold of sale and anticipated rental defaults ”. Its subprime loans are lower than those of the industry.

GM Financial, which earned $ 230 million in the first quarter, said deferred payments (borrowers who delay paying for their cars) rose to 3.5% in April, from a typical range of 1% at 2%.

Ally Financial, the successor to the previous financial arm of GMAC GMAC, which had been spun off before its bankruptcy, said that more than 1.1 million automobile customers had chosen to participate in its deferred payment program until April 16. The vast majority, 76%, had never had an extension, while 70% had never been past due.

The rate of serious delinquency, consumers who are 90 days or more behind on their car loan payments, has been slowly trending upward since 2012, according to the Federal Reserve of New York. Auto loan default rates rose slightly to 2.36% in the fourth quarter from 2.34% in the previous quarter, according to the New York Fed. Auto loan balances stood at $ 1.33 trillion at the end of last year.

While auto loan defaults are cause for concern as unemployment rates soar, Moody’s Investor Services said on Wednesday that the financial arms of GM and Ford were among those with “sufficient liquidity to eliminate market disruption coronaviruses “.

This does not mean that they will not need to raise more capital by issuing more debt. The captive business model generates liquidity as assets decline, but companies still have to issue debt to support their sales.

GM and Ford executives praised the strength of their auto finance arms while announcing their first quarter results.

Ford chief operating officer Jim Farley said Ford credit “was needed” during the pandemic, while Suryadevara, of GM, said that GM Financial is “inherently cash-generating during a downturn.”

GM received a $ 400 million dividend from GM Financial in the first quarter, while Ford Credit distributed $ 275 million to its parent company.

Downgrades are still possible

The downgrades of the two companies are monitored by S&P and Moody’s Investment Services. Investment rating companies also have Fiat Chrysler under review, although it could increase depending on its expected merger with French automaker PSA Group.

Fitch demoted Ford and GM along with their financial arms on Thursday. GM fell a notch to BBB- compared to BBB; Ford has been lowered to “BB +” from “BBB-“. The two downgrades were based on expectations that their credit profiles will remain low for a long time due to the coronavirus pandemic.

Moody’s downgraded Ford from investment grade to unwanted status in September, followed by S&P Global Ratings in March, which downgraded its credit rating to BB +, a notch below investment grade. GM stays just above the junk at Baa3 with Moody’s.

At the start of this year, Ford’s debt, excluding its lender component, was $ 15.3 billion, up $ 1.2 billion from the previous year. That compares to GM at almost $ 14.4 billion in 2019, up $ 423 million from the previous year.

Financing weapons generally carry a heavy debt, much like a bank. Ford credit reached about $ 140 billion to end last year. GM Financial was $ 96.5 billion.

S&P said Ford was “on the verge of investment grade ratings before the Covid-19 hatch”, citing its debt and lack of competitive position. as reasons for the demotion.

Ford is in the midst of a $ 11 billion multi-year restructuring plan that began in 2018 and includes $ 7 billion in cash spending. Ford’s Stone said the plan remains “on track”, although the coronavirus has had all automakers reworking their plans unlike any other crisis.

“I have never had a business plan called a pandemic,” Ford CEO and President Jim Hackett told investors on April 28. “I mean in all sincerity, because we never imagined that the economy would turn off. And the other two crises that I was in, we had deep troughs in problems, but it was unique. “


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