By Tenzin Pema
BANGALORE (Reuters) - General Motors Corp's
GM shares fell as much as 18 percent to $3.68 in morning trade Monday on the New York Stock Exchange.
"Over the next two months... it will become increasingly clear that the enormous sacrifice of value on the part of the union and bondholders will require the complete or near-complete elimination of the existing GM equity," analyst Christopher Ceraso wrote in a note titled "Game Over for Existing Equity."
The U.S. government on Friday came to the rescue of U.S. automakers with $17.4 billion in emergency loans, some $13.4 billion of which will be made available in December and January, taken from a $700 billion Wall Street bailout fund originally designed to rescue struggling financial institutions.
The government attached a string of conditions to the three-year loans and set a deadline of March 31 for the automakers to prove they can restructure enough to ensure their survival or have the loans called back.
As part of the rescue, GM is required to reduce debt by two-thirds via debt-for-equity swaps, pay half of the contributions to a retiree health care trust using stock, make union workers' wages competitive with foreign automakers and eliminate the union jobs bank, which pays laid-off workers.
"If GM and its stakeholders can navigate through a tricky set of negotiations, and all parties can agree to sacrifice value in a manner consistent with the targets laid out by the government, we still arrive at a discounted cash flow-derived equity value of less than one dollar per share," Ceraso said.
Ceraso previously rated the stock "neutral" with a price target of $2.
BANKRUPTCY FEARS REMAIN?
Even with the rescue, it is still uncertain at this point whether a GM bankruptcy has been permanently stayed, Ceraso said.
A key stipulation in the aid package for the cash-strapped automakers is that the loans could be called back if they cannot meet all the conditions and prove they are viable by March 31.
While the automakers are allowed to deviate from some of the concession targets, they still must achieve long-term viability -- measured as positive net present value -- with or without deviations.
GM is likely to need additional funds as soon as the second quarter of 2009, Ceraso said, adding that this could make it more difficult for the automaker to argue, by the end of the first quarter of 2009, that it has achieved or is on the way to achieving long-term viability.
"What's more, if the bond holders and unions can not come to an agreement over the amount of value to be sacrificed, GM may still end up in bankruptcy court," Ceraso added.
An analyst at Deutsche Bank voiced similar concerns.
"Failure to convince creditors to voluntarily exchange debt for equity could necessitate the involvement of a bankruptcy court," said the Deutsche Bank analyst, who has a "sell" rating on the stock.
"In the best case, we believe that an out of bankruptcy reorganization will likely result in GM being owned by its current creditors, the United Auto Workers and the U.S. government," the analyst said.
Even then, the dilution to existing equity shareholders will likely be extreme, the analyst added.
GM shares were down 77 cents at $3.72 in midday trade. They have shed 82 percent since the start of the year through Friday, hurt by a global recession and tight credit conditions.
(Editing by Mike Miller, Himani Sarkar)
