Automotive Industry

AUTOS: CHANGES TO COME

The auto industry is on the verge of significant changes.

CHRYSLER

Chrysler filed for bankruptcy as debt holders rejected an offer to take a 15% stake in the restructured company. The Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler's debt in return for $2 billion in cash. However, 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through.

The Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. However, the deal ultimately fell through.

An announcement of a merger with Fiat was made. Facilities will be temporarily shut until the deal is consummated. The deal is likely to be completed.

The US Government will give $8 billion of liquidity to finance the company through the bankruptcy, which may take as little as 60 days. Post-bankruptcy, the UAW will own 55% and the US Government will own 8%. Fiat would own 20% of the company, and this could increase to 35% of targets are met and could even be 16% higher if the US Government loans are repaid.

GM

General Motors Corp. (GM) is requiring its bondholders to exchange all of their debt in exchange for 10 percent in the restructured company, which the bondholders are rejecting at this point. Even though the bonds are trading at 10 cents on the dollar, this offer is worth 5-10 cents on the dollar.

GM is requiring 90 percent participation, which is unlikely. (the UAW VEBA will get 50% in the restructured company and a 40% recovery on its $20 billion claim and the US Government owns 50% in the restructured company for $15.4 billion).

Therefore, GM is likely to file and restructure in bankruptcy and lose significant market share (it may stabilize at 18%). Capacity and models to be taken out may help to reduce the 20% industry overcapacity. Pontiac, Hummer, Saab and Saturn are likely to disappear.

WINNERS/LOSERS

Ford Motor Co. (F - Analyst Report) is likely to be a major beneficiary. They have restructured their debt and have a decent shot of staying out of bankruptcy. They are likely to increase market share at GM and Chrysler's expense.

Pricing is likely to improve as 20% industry-wide overcapacity is eliminated. $3 billion of costs will be taken out in 2009. Each 1% increase in market share is nearly $1 billion to pre-tax earnings in the absence of improved pricing.

However, this may result in lower demand for US auto suppliers. Magna International (MGA - Analyst Report), American Axle and Manufacturing (AXL - Analyst Report) and Lear Corp. (LEA) have high exposure to GM and Chrysler.