Credit analyst: GM convertible will provide liquidity, not necessarily balance sheet strength

By Ronda Fears

Nashville, Tenn., Feb. 26 - General Motors Corp. (A3/BBB+) had good earnings news and guided coming results higher but the company's balance sheet strengthening plan, including the $3 billion convertible offering, was a mixed blessing from a bondholder's point of view, said Carol Levenson, head of research at Gimme Credit. In fact, the analyst said she sees more downside ahead for GM.

"GM announced it would issue up to $3 billion in convertible securities later this week, and this was placed in the context of steps to strengthen its balance sheet by $10 billion. The fact is GM is doing just what we all feared it would have to do eventually - borrowing money to fund some of its pension and other post-retirement benefit obligations," said Levenson, whose firm conducts independent research on corporate bonds for institutional investors, in a report Tuesday.

"A convertible may be a relatively inexpensive and convenient form of financing, and it may eventually be converted into stock, but it's still debt, and to make matters worse, this debt is putable at the holder's option. Liquidity, perhaps, but balance sheet strengthening, we don't think so."

The rest of the balance sheet strengthening program consists of old news about some $4 billion or more in cash that might come in from the Hughes transaction and a possible hefty dividend from GMAC, the credit analyst said. Levenson also noted that not only did GM refrain from taking a dividend from GMAC last year, but it also injected $500 million in capital to maintain GMAC's balance sheet strength.

"We wouldn't count on GMAC as a prodigious source of cash," Levenson said in the report.

"Then there's the constantly morphing definition of GM's liquidity. In the space of eight hours, the company had to correct the definition of net liquidity contained in (Monday's) 8-K filing to include marketable securities along with cash and fixed income VEBA investments. More significant, GM changed its definition of net liquidity since it filed its September 10-Q, when net liquidity did not include the $3 billion in VEBA investments."

Levenson said she would prefer to exclude both marketable securities and the VEBA investments when looking at GM's liquidity position, adding that no one should confuse fixed income securities as the same as cash. At any rate, she said, the inclusion of the VEBA investments and the exclusion of Hughes magically transformed GM's reported net liquidity from a negative number to a positive one - $1 billion at the end of 2001, by the new definition. But the analysts added, "no matter how you slice it, it's still deteriorating."

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