March 5, 2009 - General Motors, Detroit MI

As GM losses deepen, bankruptcy fears grow

General Motors, which has borrowed $13.4 billion from the federal government and is seeking billions more, acknowledged in its annual report on Thursday that its survival was in “substantial doubt.”

GM warned last month that its auditors, Deloitte & Touche, could raise those concerns, but the announcement underscored the stakes for G.M. as it sought up to $30 billion in government aid to restructure with a bankruptcy filing.

“Our recurring losses from operations, stockholders’ deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern,” the company said in the filing.

Auto stocks sank across the board on the G.M. filing, and the report was one of the factors weighing on Wall Street. General Motors shares tumbled 15.4 percent, to $1.87. Shares of Ford, which moved to restructure its debt on Wednesday, were down 0.5 percent.

Also, the company said that the compensation of its chairman and chief executive, Rick Wagoner, was reduced to $5.5 million in 2008, 61 percent less than he earned the previous year. Mr. Wagoner has agreed to work for $1 this year.

G.M.’s president and chief operating officer, Frederick A. Henderson, received compensation worth $1.7 million in 2008, a 76 percent reduction. Mr. Henderson agreed to cut his base salary by 30 percent in 2009, to $1.3 million.

G.M. said it could be forced to file for bankruptcy protection in a number of situations, including failure to receive more federal aid, failure to exact concessions from bondholders and the United Automobile Workers union, and further deterioration of an already dismal new-vehicle market in the United States.

A “going concern” letter can be a bargaining tool for a company in discussions with its unions and other stakeholders who may resist concessions without proof of a company’s distress.

Auditors for Delta Air Lines issued a going concern letter in 2004, when the airline’s cash was shrinking, and its debt was growing. In the wake of the letter, Delta arranged for financing and reached an agreement on concessions with its pilots union. But the airline ultimately filed for bankruptcy in 2005, when oil prices spiked in the wake of Hurricane Katrina.

Despite the notice, G.M., which lost $30.9 billion last year, said that it still believed it could be viable and that it did not intend to file for bankruptcy protection.

G.M. has until the end of this month to reach deals with the U.A.W. and its bondholders and to show President Obama’s auto industry task force that it is making progress on the restructuring plan that it filed with the Treasury Department in February. If it misses the deadline, G.M. would be unlikely to receive the additional loans it says are needed, and the government could demand immediate repayment of G.M.’s outstanding loans.

G.M. said in Thursday’s filing that it had no way to repay the loans right now and could soon become insolvent without at least $9.1 billion more aid. It wants a total of $30 billion.

“If we fail to obtain sufficient funding for any reason, we would not be able to continue as a going concern and could potentially be forced to seek relief under the U.S. Bankruptcy Code,” it said.

Analysts at Standard & Poor’s Ratings Services have already said there was a high probability that G.M. would have to file for bankruptcy filing, given the weakness in the car market. Vehicle sales in recent months have been at their lowest levels since the recession of the early 1980s.

The notice from G.M.’s auditors is not a sign that a bankruptcy is imminent, but is a warning from auditors that one may occur unless a company takes significant restructuring steps. The letter also protects auditors from lawsuits by shareholders and other parties in case a company’s financial condition deteriorates and a Chapter 11 filing takes place.

G.M. is cutting three of its eight brands — Saturn, Saab and Hummer — and eliminating most models made by a fourth, Pontiac. The company is cutting 10,000 salaried jobs globally this year, reducing pay of those workers who remain and offering more buyouts to hourly workers. It plans to close 14 of its 47 manufacturing plants by 2012.

In its regulatory filing, G.M. said it was seeking assistance from several foreign governments, including Britain, Canada, Germany, Sweden and Thailand. It said its viability plan assumed $6 billion in financing from outside the United States “plus amounts to satisfy certain legal requirements.”

The government of Canada has said it may provide assistance, but German officials have questioned whether to help the auto company.

“We believe that obtaining funding from these governmental sources will be necessary to continue to operate our business in its current scope,” G.M. said. A lack of help from the United States or foreign governments may require the automaker to “shrink or terminate operations or seek reorganization” for subsidiaries outside the United States.

G.M. added, “We have not received any commitment with regard to the additional proposed borrowings from either the U.S. government or any foreign governments, and there is no assurance that we will be successful in obtaining the additional governmental funding we will need to continue to operate our business.”

Original Story - New York Times