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Politics : Politics for Pros- moderated

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To: Brian Sullivan who wrote (299009)	3/30/2009 7:52:25 PM
From: Brian Sullivan	Read Replies (1) of 794007

GM and Chrysler Deemed Not Viable by President Obama GM has 60 days to issue a more drastic viability plan or it will likely be forced to file Chapter 11 bankruptcy. President Obama's speech today indicates that the government will stand behind a GM bankruptcy filing and will also guarantee GM and Chrysler warranties. We disagree with the government's assertion, however, that a Chapter 11 filing would be "quick and surgical"; rather, we think this would take a very long time. GM's new plan must have more realistic market share assumptions, quickly achieve full competitiveness with transplant firms, reduce debt far more than the current loan agreement requirement of two thirds of unsecured debt, and allow GM to be free-cash-flow positive in a normal environment. The critical issue for GM now is whether the unsecured creditors and the UAW be willing to make concessions. We think the UAW will reluctantly do so because we think it wants to avoid bankruptcy at all costs. The creditors may not be so willing, however, because the creditors may not be willing to take GM stock in exchange for their debt investments. The risk the creditors take is that GM then goes into bankruptcy and the debtholders have their investment totally replaced with new GM stock anyway. quicktake.morningstar.com Valuation We are lowering our fair value estimate to $0.10 per share from $1.30. The change reflects probability weighing our previous fair value estimate of $1.30 at 10% and a 90% probability that GM's stock is worth $0. Although we do not think the U.S. government will let GM liquidate, we no longer think GM is too big to stay out of Chapter 11 bankruptcy. A price of $0 per share reflects the risk that GM shareholders are wiped out either in a bankruptcy reorganization or by massive dilution from a debt-for-equity exchange. The only reason the fair value estimate is not $0 is because of option value on the stock as long as GM does not liquidate. Even if the government steps in to prevent a bankruptcy filing, there is still risk that equityholders will be nearly wiped out. The loan from the Bush administration called for two thirds of unsecured creditors to trade their bonds for common stock, which we estimate would make them owners of 94% of GM's equity. This massive dilution and bankruptcy risk means we would not buy GM's stock under any circumstances.

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