March 22, 2005
By James Mackintosh in London and Jennifer Hughes in New York
Financial Times
GM logoGeneral Motors bonds slid to new lows as investors worried that GE Capital’s decision to withdraw a $2bn loan facility for the automaker signalled new potential financing concerns.
GE Capital, a unit of General Electric, has withdrawn the $2bn facility for GM and its suppliers days after credit rating agencies warned that the carmaker could be downgraded to junk bond status.
GM, which lowered its profit outlook last week and said it expected a $2bn operating cash outflow this year, will now provide its own factoring, or early payment, service to its suppliers.
GE’s decision move will require GM’s finance arm to raise the funding for the service, increasing the pressure on its liquidity.
The carmaker’s benchmark bonds were sharply lower in early trading in New York. Yields jumped more than half a percentage point as investors reacted to GE Capital’s decision.
The bonds have already fallen heavily in the past week, pushing GM’s borrowing costs sharply higher.
However, GM has $23bn of cash and liquid securities in its industrial unit and said none of the remaining $9bn of bank loan facilities available to its car unit had covenants linked to its credit rating.
GM Acceptance Corp, the finance arm that will take over the scheme, has another $24bn of cash and $64bn of committed credit lines. The group has a total of $301bn of secured and unsecured debt outstanding.
One financial analyst said GE Capital's decision to pull out was a bad sign. "It looks as though one of the industrial partners is voting with its feet and getting out before this becomes a bigger issue," he said.
The carmaker said it was coincidence GE Capital had pulled out soon after the credit rating outlook was lowered, fulfilling a clause in the contract allowing GE Capital to cancel immediately. Mark Fischer, director of supply risk management at GM, said: "After GE Capital announced plans to discontinue their early pay programme, it was important for GM to continue to provide this benefit to its suppliers given the current challenges of the automotive industry."
The scheme allowed GM's suppliers to be paid early by GE Capital by accepting a discount on their invoiced amount. GM would then pay GE Capital the full amount owed to the supplier on the final payment date. The carmaker owed GE Capital $1bn at the end of 2004. But the scheme also allowed GM to defer payments to GE Capital, creating another potential line of credit for the carmaker.
GE Capital told GM last year that it would terminate the loan facility at the end of 2005. But its contract allowed it to pull out if the carmaker's credit rating fell to BBB minus, the lowest notch of investment grade, with a negative outlook - as it was last week by Standard & Poor's. Yesterday, GM's bonds continued to slide as investors became convinced that the carmaker would be downgraded to junk.
GE Capital declined to comment.
http://news.ft.com/cms/s/0ba12e64-9a78-11d9-a094-00000e2511c8.html