GM sees credit squeeze post-Lehman

DETROIT (Reuters) - The bankruptcy of investment bank Lehman Brothers Holdings IncLEH.N and turmoil in the U.S. financial sector will prompt a contraction in credit, raising the stakes for companies like General Motors CorpGM.N looking to fund turnaround efforts, GM President and Chief Operating Officer Fritz Henderson said on Monday.

Henderson, who was speaking to the Reuters Autos Summit in Detroit, said that while credit markets have been effectively closed to most corporate borrowers, the shakeout in the U.S. financial sector could add to the near-term pressure.

"Capital markets have been quite difficult, and this is just going to make it more so," Henderson said.

He added: "We're in for some rough waters here at least for this week if not the next couple of months."

As part of a plan announced in July, GM is targeting cost reductions of $10 billion, and up to $5 billion in a combination of asset sales and new borrowing to shore up its liquidity between now and the end of 2009.

Henderson said GM, like other restructuring companies, was facing tough credit markets at a time when equity financing and private equity firms also have been in retreat.

"In terms of raising capital, you've got pretty much closed debt markets for anything other than triple-A-rated companies," Henderson said. "If you look at any company that's got business challenges, the markets are very difficult to deal with."

Because of its exposure to autos and the U.S. housing market through its remaining 49-percent stake in its former finance arm GMAC, GM has been hit by the downturn in two of the weakest sectors in the U.S. economy, Henderson said. "We've felt it to our bones within General Motors," he said.

Henderson said the uncertainty in capital markets made it more urgent for U.S. lawmakers to approve funding for $25 billion in low-cost loans for automakers to fund plant investment and retooling for fuel-saving technology.

The framework for that loan program was included in last year's energy law that established the first large increase in U.S. fuel economy targets since standards were introduced more than 30 years ago. Lawmakers must appropriate about $3.8 billion to cover default risk for the loans. Congressional Democrats say they want to pass that legislation this month.

But Henderson said GM would continue with its established restructuring plan regardless of what Congress does on the loan program.

NO REVERSAL OF PLANT CLOSINGS

GM has announced plans to close four North American truck plants, including one in Ohio and one in Wisconsin, and Henderson said those closure decisions would not be revisited if low-cost, government-backed loans became available.

"It wouldn't at all change the actions we've announced," Henderson said.

He declined to say how much GM could borrow under the federal loan program, saying it would depend on how rules governing the industry's use of the funds are set.

Wall Street analysts have suggested GM could borrow close to $4 billion under the program, a prospect that had supported its shares and bonds in recent trading.

On other benchmarks for GM's turnaround, Henderson said a recent easing in commodity prices could provide some relief headed into 2009. However, prices for key metals remained subject to "astonishing volatility," he said.

GM, he said, remained "confident" it could get the $1.5 billion in savings it has targeted through early retirement offers now being considered by its U.S. white-collar staff, combined with a pay freeze and cuts to retiree health care.

"We have to see what the take rate is for the employees taking early retirement, but we feel quite confident in our ability to achieve the savings we need," he said.

Henderson said GM's high-stakes development of the all-electric Chevrolet Volt, slated to go into production in a Detroit-area factory in late 2010, would be one clear target for federal loans for investment in new technology. The car is being designed to run 40 miles on a single battery charge.

"We would certainly think that a project like that, if it didn't qualify, then what does?" Henderson said.

The Volt, he said, remained on track for a late 2010 launch. GM plans to name a battery supplier for the Volt by the end of the year, Henderson said.

Two supplier groups are in the running for that closely watched contract: Korea's LG Chem (051910.KS) is competing against a partnership between Continental AG(CONG.DE) and privately-held A123 Systems.

Analysts have cautioned that GM's turnaround still hinges on steering clear of deepening costs in GMAC and another former subsidiary, bankrupt parts maker Delphi Corp. DPHIQ.PK

GM has offered to step up its support by taking over Delphi pension liabilities and paying $1.2 billion in cash to its former parts unit. Delphi estimates that takes GM's total support to near $10.6 billion.

But Henderson stressed that was a Delphi estimate and said GM would review whether to take additional charges when its quarter closes. GM has reserved some $11 billion to date for Delphi losses.

Meanwhile, GMAC, now controlled by Cerberus Capital Management, completed a $60-billion refinancing for its ResCap mortgage lending unit in June and has taken other action in the months since to cut costs and shed risk.

While those were needed steps, other action could still be necessary for GMAC, Henderson said. "I don't think in the current capital markets, you ever rest with great confidence," he said.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Kevin Krolicki; Editing by Peter Bohan and Carol Bishopric)