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GM bankruptcy 'possible'

2008-07-03 11:09

Traders work on the floor of the New York Stock Exchange. Wall Street began the third quarter with an erratic session on Tuesday as a mix of news made it clear the US is still deep in economic problems, especially in the automotive sector. (Photo: Ri

General Motors will need to raise as much as $15 billion in cash to shore up liquidity and bankruptcy is "not impossible" if the US vehicle market continues to slump, Merrill Lynch said.

Other analysts have suggested GM, whose shares fell to a new 54-year low on Wednesday, needs to raise funds to ride out the downturn in the US auto market through 2009.

But Merrill's estimate of GM's financing needs is the highest yet. It also carried the most stark warning of the bankruptcy risk for the largest US carmaker.

GM declined to comment directly on the Merrill Lynch report but it believes it has sufficient liquidity for 2008 despite lower volumes and could take more steps to cut costs if sales conditions worsen.
"If conditions continue to deteriorate, we would consider other operating measures," GM spokeswoman Renee Rashid-Merem told Reuters.

Merrill Lynch analyst John Murphy cut GM to "underperform" from "buy" and lowered his price target for the largest US carmaker to $7 from $28. Shares fell as much as 11 percent to $10.50 in Wednesday's trading in the New York Stock Exchange. The cost to insure GM's debt rose.

Murphy also lowered his forecast for 2008 US 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 carmakers, 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 $15bn 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.

Deeper downturn ahead?

The deepening concerns about the sales outlook for GM come after a June sales report that showed industry-wide auto sales dropping to a 15-year low.

GM's own sales fell by a narrower-than-expected 8% on an adjusted basis after the carmaker offered zero-percent financing for six years.

But Deutsche Bank analyst Rod Lache said GM could see a "payback" from its June sale in coming months, with its US market share dropping back below 20% from 22% in June as sales fall back.
Several other Wall Street banks including Citigroup also downgraded carmakers and parts suppliers on Wednesday and lowered their outlook for US auto sales this year and next.

Citigroup analyst Itay Michaeli lowered his forecast for 2008 US vehicle sales to 14.5 million units from 15 million, saying plummeting resale values of trucks and SUVs was crimping demand already hurt by weak housing and tighter credit.

Itay said a full recovery in the US auto market would begin only in 2010 or 2011.
Michaeli said GM has to weather the current downturn with considerably less backup liquidity than smaller rival Ford, which tapped the leveraged loan market at its peak in late 2006 to raise $23bn.

"While we do not believe GM is facing an immediate cash crunch, the urgency to shore up liquidity to navigate through a difficult 2008-2009 has risen significantly in recent months," Michaeli said. He cut GM's target price to $14 from $21.

Industry tracking firm Global Insight cut its forecast for the annualised sales rate in July to 14.4 million units and cut its 2009 forecast to 14.2 million units in sales, citing the risk of higher average oil prices in the months ahead.

Credit option contracts on the Chicago Board Options Exchange that would pay out if GM or Ford default before September 2012 ticked higher. The contracts, which remain lightly traded, point to a roughly 73-percent default risk for GM and a 69-percent risk for Ford over that period.


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