Merrill says GM bankruptcy "not impossible"

2/07/2008 - 15:38

By Soyoung Kim

DETROIT (Reuters) - General Motors Corp will need to raise as much as $15 billion in cash to shore up liquidity and bankruptcy is "not impossible" if the U.S. auto market continues to slump, Merrill Lynch said on Wednesday.

Although other analysts have suggested GM needs to raise funds to ride out the downturn in the U.S. auto market through 2009, Merrill's estimate of GM's financing needs was the highest yet. It also carried the most stark warning of the bankruptcy risk for the largest U.S. automaker.

Shares of GM, which have lost more than half of their value over the past two months, fell more than 7 percent to $10.88 in early trading.

GM declined to comment directly on the Merrill Lynch report but said it believes it has sufficient liquidity for 2008 and could take more steps to cut costs if sales conditions worsen.

"We continue to believe the company has sufficient liquidity for 2008 despite lower volumes," GM spokeswoman Renee Rashid-Merem told Reuters. "If conditions continue to deteriorate, we would consider other operating measures."

Merrill Lynch analyst John Murphy cut GM to "underperform" from "buy" and lowered his price target for the largest U.S. automaker to $7 from $28.

Murphy also lowered his forecast for 2008 U.S. industry-wide light vehicle sales for the third time this year and said the recent drastic decline in sales would likely to continue through 2009.

Murphy forecasts light vehicle sales of 14.3 million units this year and 14 million units for next year. That compares with 16.15 million units in 2007 and is sharply lower than the current forecast of most major automakers, including GM.

"The recent extreme deterioration in volume and mix is driving much higher cash burn and eroding GM's cash position," Murphy said. "We believe $15 billion is necessary because there is downside risk to our current estimates and a greater cushion is essential."

Any capital GM raises has the potential to dilute equity if it's done through convertible offering or the issuance of additional equity, both possibilities analysts have raised.

(Reporting by Soyoung Kim; Editing by Derek Caney)

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