…according to Goldman Sachs, which ceased coverage of the ailing auto maker on Thursday because
…there is not currently a sufficient basis for determining an investment rating or price target for this company. Our previous investment rating and target are no longer in effect and should not be relied upon.
So how does Goldman get the $22bn figure? Here are the workings of analyst Patrick Archambault.
Which brings us onto the next question: Where will the money come from? As you can see from the above, two sources.
1) A $4bn loan from the Department of Energy loan programme
2) $18bn from the TARP TERP
While this infusion could take many forms, we think the most likely would be a government loan or preferred investment. We think the terms would be close to the current TARP package entailing a 5% interest rate for 5 years, with a reset to 9%, and warrants valued at 15% of the nominal value of the preferred. This is consistent with past government capital injections.
Of course, a capital injection of this scale would be hugely dilutive for existing shareholders and Mr Archambault makes the point that GM would also need to restructure its debts to become a viable entity.
This would entail a debt for equity swap and yet more dilution.
Including the $8.4 bn in UAW-related loans that GM does not include in its balance sheet debt, GM has $52.8 bn in total debt. Left as is, this would represent leverage of 12.5X and 5.8X on our 2010 and 2011 EBITDA estimates. Without restructuring the existing debt, interest expense for GM would accrue at an annual rate of $3.8 bn.
GM bond debt: Existing public bonds exchanged for a combination of new bonds and equity at 35% of original par value. 75% would be in the form of new 12% bonds and the remaining 25% in new equity. 35% of par is close to where most of these obligations already trade, and in some cases well below; however, we think a compelling case could be made for an exchange especially if it’s seen as an enabler of government assistance which would stabilize GM’s outlook.
UAW VEBA debt and convert: Assume the debt retains 100% of its par value, but with the option of 100% conversion to equity. These obligations represent a material portion of the long-term funding for the UAW VEBA; we therefore think it is unlikely that the union would voluntarily accept a haircut (decrease in principal). But we think a compelling case could also be made for conversion to equity if this process is seen as an enabler of government support.
Shares in GM currently 0.07 cents lower at $3. That values the world’s biggest car market – by volume – at just $1.8bn.
Related links:
GM is worthless – FT Alphaville
Illiquid GM – FT Alphaville