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General Motors Company (GM - Analyst Report) plans to double its existing revolving credit facility of $5 billion in a bid to strengthen its cash reserve. According to the Wall Street Journal, the Detroit-based automaker is in talks with existing credit suppliers including J.P. Morgan Chase, Morgan Stanley, Citigroup Inc, Barclays and Deutsche Bank for the credit line.
However, the company has no immediate shortage of cash. As of June 30, 2012, GM had cash, cash equivalents and marketable securities of $33.6 billion compared with $32.2 billion as of December 31, 2011.
GM also took measures to reduce its pension obligations. The company has offered lump-sum payments to about 42,000 salaried retirees, ridding of nearly $26 billion in pension obligations. According to federal filings, its global pension plans were underfunded by $25.4 billion as of December 31, 2011, up from $22.2 billion a year ago.
However, WSJ noted that continued losses in European operations, higher spending on new vehicles and the need to buy back shares from the U.S. Treasury have possibly persuaded GM to seek additional credit line.
GM’s European arm Opel lost $747 million last year due to weak car sales, high fixed costs and excess production capacity. This resulted in a total loss of more than $12 billion in 12 years. In the first half of 2012, Opel’s loss amounted to €938 ($1,200) per vehicle sold, according to the CAR Center of Automotive Research at the University of Duisburg-Essen.
In order to reverse the 12 years of losses in Europe, particularly from the Opel brand, GM formed a global alliance with PSA Peugeot Citroen (PEUGY). The pact will help both the automakers reduce at least $2 billion in costs.
The present Euro zone financial crisis has affected the operations of many global automakers, especially GM and Ford Motor Co. (F - Analyst Report). Both the automakers have a significant exposure to the market. Ford expects to lose more than €1 billion in Europe.
GM, a Zacks #3 Rank (Hold) company, reported a sharp 41% fall in profits to $1.49 billion or 90 cents per share in the second quarter of the year from $2.52 billion or $1.54 in the same quarter of 2011. Nevertheless, profits exceeded the Zacks Consensus Estimate by 15 cents per share.
Revenues in the quarter fell 4.5% to $37.61 billion, which is lower than the Zacks Consensus Estimate of $37.98 billion. Unit sales rose 3% to 2.39 million vehicles from 2.32 million vehicles in the second quarter of 2011. The automaker occupied a worldwide market share of 11.6% during the quarter, down from 12.3% a year-ago.
The decline in profits and revenues was attributable to strengthening of U.S. dollar against most of the major currencies as well as weak macroeconomic conditions globally, especially in Europe and South America.