A DIP in the Road

The auto makers are facing hard times. The best way for GM to survive may be to wave the white flag.

For years the auto makers have been struggling to turn a profit. Labor costs, capital costs, and lousy designs have brought the industry to its knees. Now a looming recession threatens to put the nail in the coffin. What to do?

Ironically, Detroit’s troubles have not been brought on by the global financial crisis. They’re a product of accumulated losses. Over the past four years GM has lost a whopping $113 dollars per share, and now no one wants to lend to them. That’s brought on their liquidity crisis.

But if the company declares bankruptcy and seeks to reorganize, DIP financing-secured lending by a “Debtor-in-Possession”-would be available. GM has lots of assets that would make DIP lending secure. And the company could use bankruptcy a negotiating tool with the unions.

Autos matter to the US economy, and the only thing standing between GM and the cash they need is management ego. For GM, the road ahead may be paved through a DIP. This has been Doug Tengdin with the Charter Trust Global Market Update.

Douglas R. Tengdin, CFA
Chief Investment Officer
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