Will GM follow Delphi into bankruptcy?

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Will GM follow Delphi into bankruptcy?

One analyst puts chance of bankruptcy at GM at 30% after Delphi filed, but another says no.

October 10, 2005: 5:32 PM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - The chances that General Motors will file for bankruptcy are now about 30 percent, according to one industry analyst, following the bankruptcy filing by the company's former parts unit, Delphi.

Rod Tadross, Banc of America's securities analyst, estimated Monday that GM's retirement liabilities rose to about $6 a share after the automaker warned Saturday that it could be on the hook for as much as $11 billion in contract obligations to its former employees at Delphi.

GM spun off the world's largest auto-parts maker in 1999 but retained responsibility for some of the company's retirement health and pension benefits if Delphi filed for bankruptcy before 2007.

"Our strong belief that the United Auto Workers union will be tougher on GM than on Delphi should get GM to more seriously consider bankruptcy protections," Tadross wrote in a report Monday morning.

Tadross also cut his 12-month target price for GM shares to $18 from $32.

Shares of GM (down $2.81 to $25.48, Research) ended Monday down nearly 10 percent, at $25.48 a share on the New York Stock Exchange, following the Saturday Chapter 11 filing by Delphi. In Chapter 11, a company is protected from creditors as it tries to reorganize and work out a plan to pay its debts.

Just a surface wound?
Despite recently sustaining billions in losses from its core North American auto operations, GM shows a healthy balance sheet, with $32.3 billion in cash on hand.

It also said it has a fully funded pension plan, though that does not include retiree health care costs, which have become a significant burden for the automaker.

Auto analyst David Healy of Burnham Securities said he agrees that Delphi's bankruptcy is a significant hit for GM but one that he thinks the embattled automaker is well positioned to handle, given its strong balance sheet.

"I still think it's unlikely," said Healy, about a bankruptcy threat at GM. "I think GM has the liquidity it needs. In addition to the cash, it has $50 billion in untapped borrowing."

Even though Healy said GM probably will have to assume billions in additional contract obligations due to the Delphi filing -- maybe as much as $11 billion -- he said Delphi's move could eventually work out to be a good thing for its former parent.

He believes the United Auto Workers would be more willing to deal with GM on the cost savings, as it seeks to avoid the risk to more members and retirees. And he said that GM estimates it is paying $2 billion a year in above-market pricing when it buys parts from Delphi.

"A billion here and a billion there adds up," he said. "In the long run, a restructured Delphi could supply GM with parts at lower prices."

Ratings repercussions
Standard & Poor's downgraded its credit rating on General Motors to 'BB-' from 'BB,' following Delphi's bankruptcy filing, saying that repercussions from the filing could impede GM's efforts to turn around its ailing North American automotive operations.

Among the many ways S&P said GM could be negatively affected by Delphi's filing, the agency focused on labor issues.

In addition to fallout from labor strife at Delphi, S&P said "developments at Delphi could adversely affect GM's own labor relations, at a time when GM continues to seek concessions from the UAW to reduce GM's burdensome health care costs."

GM Chairman and CEO Rick Wagoner has said repeatedly this year that the automaker needs to negotiate lower health-care costs for active and retired union members and their families but has so far not won an agreement in negotiations.

GM spokesman Jerry Dubrowski said the company is not commenting on Tadross' note to clients or its own view of the risk of a GM bankruptcy in light of the Delphi filing.

In its statement Saturday evening, GM said it was too soon to specifically assess the impact of the Delphi filing on its own finances, adding it "expects no immediate effect on its global automotive operations." It said it could potentially face anywhere from zero to $11 billion in contract obligations from Delphi's filing.

Wagoner dodged commenting on the risk of bankruptcy in prepared comments in June when he discussed financial problems facing the automaker.

"What happens if we can't reach agreement with the United Auto Workers on [retiree health-care costs] promptly? Well, I don't believe that it serves a useful purpose to speculate on that," he said at the time.

"Let me just emphasize that our very strongly preferred approach is to do this in cooperation with the UAW, because we're convinced that is the best way for our employees, our stockholders, all our constituents."