UPDATE: GM To Raise $1.5 Billion Loan As Cash Concerns Mount
Dow Jones

DETROIT -(Dow Jones)- General Motors Corp. (GM) on Monday said it plans to execute a $1.5 billion senior secured loan with a seven-year term by the end of the year, an effort to take advantage of asset-backed fund-raising opportunities that may not be available to the company in 2007.

In a statement, the automaker, which lost $10.6 billion last year and has seen its cash position weaken in recent quarters, said the facility is intended to " enhance" its liquidity, and "take advantage of robust market conditions."

GM could face problems borrowing once its shareholder equity becomes negative in early 2007, as the company's bond indentures could prohibit it from pledging certain assets to back loans. GM is looking to avoid such roadblocks by simply securing a loan before the end of this year, spokeswoman Gina Proia said.

GM's shareholder equity will turn negative due to new accounting standards forcing the auto maker to account for all of its future benefit obligations. The benefit obligations, when pooled with all other liabilities, will outweigh the company's assets. The accounting change does not affect cash flow.

The latest loan follows GM's decision earlier this year to extend a $5.6 billion revolver until 2011. Under new terms of that revolver, which now amounts to $4.6 billion, GM is allowed to tap the loan as it sees fit. GM is backing both the $4.6 billion revolver and the planned $1.5 billion loan with assets in North America, including inventory, plants and property.

Moody's Investors Service assigned a Ba3 rating to the proposed $1.5 billion secured term loan, reflecting what the firm calls" favorable asset protection and recovery potential that would be afforded to this instrument relative to the company's unsecured obligations."

Fitch Ratings assigned a BB/RR1 rating, one notch higher than the Moody's grade.

Liquidity Has Dwindled

GM's liquidity has come under fresh scrutiny even as the company works to implement a massive turnaround in its North American operations. In various public disclosures, the company has said its liquidity position hinges completely on its ability to turn around its North American operation, which continues to bleed red ink due to shrinking market share, high costs and falling production.

As of the end of the third quarter, GM reported $20.4 billion in gross liquidity, down from $22.9 billion at the end of June. GM's gross liquidity includes cash, marketable securities and readily available assets of the Voluntary Employees' Beneficiary Association, or VEBA.

The pile of cash will be fattened significantly when GM closes the sale of a controlling stake in its General Motors Acceptance Corp. unit to a group of investors led by Cerberus Capital Management. GM plans to close the sale by Nov. 30. GM will receive $10 billion upon the sale's closing. GM also will hold onto $20 billion in GMAC automotive leases, which it plans to turn into about $4 billion in cash over three years.

GM's negative cash flow remains a key concern for investors, who have seen an alarming rate of cash burn as a reason to poke holes in GM's turnaround plan. GM's bottom line has improved over the course of 2006, but the company posted an adjusted operating negative cash flow, including special items, of $5.1 billion in the third quarter, compared with a $2.5 billion negative figure a year earlier.

Cash Needed For Restructuring

Moody's analyst Brian Clark said "GM is going to need considerable liquidity in order to fund the large cash requirements resulting from its aggressive employee buy-out program, its participation in any resolution of the Delphi reorganization, the operating losses that will continue until its restructuring program takes hold, and challenges posed by the 2007 (United Auto Workers) negotiations. The company also has to be prepared for any potential slowdown in the US economy."

GM is currently trying to broker a deal with top supplier and former subsidiary Delphi Corp. (DPHIQ), which filed for bankruptcy in 2005. GM is on the hook for at least $6 billion in costs related to employee obligations agreed to before GM spun Delphi off in 1999, but the final terms have not yet been hammered out.

"Despite GM's continuing progress in establishing a sizable liquidity cushion, the company continues to face daunting operational and competitive challenges," Moody's said. "The increasingly competitive position of Asian manufacturers and the shift in consumer preference toward more fuel efficient vehicles will continue to severely pressure the company's share position."

J.P. Morgan Securities Inc. and Credit Suisse Securities LLC are the arrangers of the proposed $1.5 billion facility, and JPMorgan Chase Bank, N.A. is the administrative agent.

Shares of GM ended Monday's session at $35.09, up 42 cents or 1.2% from Friday's closing market. The stock has gained 80% this year, owing in part to investor optimism that the company's restructuring program is taking hold.

-By John D. Stoll, Dow Jones Newswires; (313) 226-1249; john.stoll@ dowjones.com

  (END) Dow Jones Newswires
  11-13-06 1834ET
  Copyright (c) 2006 Dow Jones & Company, Inc.
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