14 Apr 2009

GM stock hit by bankruptcy report

9:42 am on 14 April 2009

General Motors has seen its shares fall sharply after a report that the US government wants the firm to start bankruptcy proceedings by 1 June.

The New York Times said the Treasury Department wants a court-led reorganisation, but the company wants to reorganise without going to court.

The BBC reports shares in the carmaker shed 17.6% to $US1.68 in morning trade in New York on Monday.

On 30 March, the US government gave GM 60 days to develop a new restructuring plan and gain further federal aid.

The White House has already given the company $US13.4 billion in federal funding to prevent it from collapsing, but any additional aid requires the firm to meet tougher rules.

It is not alone. Chrysler was given 30 days to submit new plans for recovery from 30 March.

President Barack Obama, who recently ordered the resignation of GM chief Rick Wagoner, has argued that bankruptcy protection could help the restructuring process.

According to the Wall Street Journal, creditors may discover their rights are limited and are nervous that bankruptcy proceedings could be one step before collapse.

Industry outlook

Car companies worldwide have been hard hit by a slowdown in demand, as consumers tighten their belts faced with the current financial crisis.

The BBC reports the problems faced by GM pre-date the recent crisis. It and other US car companies have faced increasingly tough competition from Japanese car firms, which have developed more energy-efficient and smaller models.

GM and others have been reducing their workforce and cutting costs in a bid to improve their balance sheets.

The glum outlook for the industry was highlighted last week when the ratings agency Standard & Poor's reduced certain debt ratings of GM and Chrysler Holding, in view of their uncertain outlook.

Ford rating

Meanwhile, Standard & Poor's has raised Ford's credit ratings to "CCC+" from "SD," or selective default, after the company announced it had lowered its debt.

Last week, Ford said it had cut $US9.9 billion from its total debt of $US25.8 billion under what it called a "successful" debt restructuring exercise.

The company said it expects to lower its annual interest expense by more than $US500 million and does not need government aid.