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Does Bankruptcy Loom for GM?


Auditors have doubts about company's ability to survive.

General Motors (GM) has received $13.4 billion in federal bailout funds and it may be money down the rabbit hole as auditors warn of going concern at the struggling automaker. Deloitte & Touche has raised "substantial doubt" about GM's ability to survive stemming from recurring losses, stockholders' deficit and insufficient cash flow.

The company plans to eliminate 47,000 jobs and it has renegotiated terms with lenders to avoid violating terms of the agreement. But the company says it needs another $16.6 billion in federal loans and is seeking $6 billion in foreign aid in order to survive. GM is closing or selling Saturn, Hummer and Saab brands.

By March 31, GM must have signed agreements from the United Auto Workers Union and debt-holders to show how the company will return to profitability or it may be forced to liquidate under Chapter 7.

There will be no miracles because GM says auto sales are unlikely to rebound in the immediate future.

"There is no assurance that the global automobile market will recover or that it will not suffer a significant further downturn," GM said.

J.D. Power and Associates expects US auto sales to fall to about 11.4 million units in 2009, the lowest number since 1982 when 10.5 million vehicles were sold.

GM says sales could fall to 9.5 million vehicles in 2009 and rebound to 12.8 million by 2011 and climb to nearly 15 million by 2013. That's looking overly optimistic now.

Brett Hoselton, an analyst at KeyBanc Capital Markets, says GM, Ford (F) and Chrysler could see year-over-year sales drop 40% to 50%, while sales at Toyota (TM), Honda (HMC) and Nissan (NSANY) decline 30% to 40%.

Ford hopes to exchange as much as 40% of its debt for cash and stock in an effort to stay competitive. Unlike General Motors and Chrysler, Ford hasn't taken federal bailout money. This could give Ford a competitive advantage over its US rivals - if it survives.

General Motors and Chrysler also seek to swap debt for equity. It's a good move to get the books in order, but someone is sure to ask: What's the value of shares in a dead company?
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