Saturday, January 10, 2009

More on General Motor's Predicament
How did General Motor’s run through so much liquidity so fast? Static measures like cash and liquidity don’t really give us the full answer. We need a more dynamic view of what’s driving GM’s liquidity; something that focuses on uses and sources instead.

Here’s a table that shows where GM has been using and sourcing its liquidity for the nine months ending in September of this year.

Cash income has been the biggest use of liquidity, caused by the steep drop in vehicle sales that began earlier this yearWorking capital has been a use largely because of decreasing accounts payable – a sign that suppliers are cutting back on the credit they give GM. Capital spending is another major use, as the company invests in new models. Credit market conditions forced GM to pay down much of its short-term debt, draining away even more liquidity.

GM met those demands for liquidity through liquidating assets, mainly by selling marketable securities and letting its portfolio of vehicle leases run off. The next biggest source was borrowing under its committed bank lines. But the most important source of liquidity by far was drawing on cash reserves.

GM found the sources it needed to survive, but only by consuming crucial liquidity reserves. That’s not sustainable. As of September 30, 2008, the company had only $7.2 billion in operating lease assets, $300 million in marketable securities, $16.0 billion in cash and equivalents, and $100 million in unused bank lines – at best enough last another nine months.

So it seems GM has been telling the truth. It really does need help to survive the next year. The challenge for them will be to put their liquidity on a sustainable basis, along with the rest of their financing.


Keith said...

It's interesting to me that I haven't seen this data and analysis in any of the major publications. Shouldn't it have huge implications on the bailout talks? Thanks for the insight!

Anonymous said...

At my institution we look at cash flow like this:

+/- working capital changes
+/- capex
+/- taxes
= free cash flow
- interest payable
- debt repayments
=cash flow after debt service

Your FCF divided by your debt service gives you your debt service cover ratio and this suggests how much headroom you have in your cash flows before the cash flow generated from operations is insufficient to meet your debt service.