Merrill says GM bankruptcy possible

By Soyoung Kim

DETROIT (Reuters) - General Motors Corp (GM.N) will need to raise as much as $15 billion in cash to shore up liquidity and bankruptcy is "not impossible" if the U.S. auto 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 U.S. 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 U.S. automaker.

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 U.S. automaker 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 U.S. 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 automakers, 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 $15 billion 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 percent on an adjusted basis after the automaker 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 U.S. market share dropping back below 20 percent from 22 percent in June as sales fall back.

Several other Wall Street banks including Citigroup also downgraded automakers and parts suppliers on Wednesday and lowered their outlook for U.S. auto sales this year and next.