GM sheds bankruptcy risk - now comes the hard part

DETROIT (Reuters) - By pledging to cut $10 billion in costs, General Motors Corp GM.N has convinced investors and creditors that the immediate risk of bankruptcy has faded.

After touching 54-year lows, GM shares have rallied by 45 percent this week, and the cost to insure the top U.S. automaker's debt against default has eased.

Now comes the hard part: convincing millions of U.S. consumers to take another look at its more fuel-efficient passenger cars as the company attempts to break its reliance on the fast-sinking market for trucks and SUVs.

"They need to make a transition, but that isn't going to happen overnight, and the transition is going to be difficult," said Standard & Poor's equity analyst Efraim Levy, who expects GM to lose money in the U.S. market through 2009.

Analysts credit GM with taking important steps to revive its car lineup under product czar and Vice Chairman Bob Lutz. For instance, some analysts regard the company's redesigned Chevy Malibu as the best mid-sized sedan on the market.

Malibu sales have risen 31 percent and selling prices for the new car are up by several thousand dollars on average.

But Toyota Motor Corp's (7203.T) flagship Camry still outsells the Malibu by an almost 3-to-1 ratio. Honda Motor Co (7267.T), the only major automaker to post U.S. sales growth in the first half, sells more than twice as many Accords.

And that highlights a lingering risk with the latest, sweeping restructuring plan GM has unveiled.

The question remains: Can GM can cut thousands of management jobs and refocus smaller marketing and capital investment programs on the highly competitive passenger-car business while retaining its leading share of the overall U.S. market?

As part of its plan to free up $15 billion in cash by the end of next year, GM has cut its truck production by 300,000 units over that period, slashing output of slow-selling, big vehicles like the Chevy Silverado pickup and the Tahoe SUV.

Those reductions, which hinge on quicker closures for four North American truck plants, amount to almost 8 percent of GM's sales last year.

But GM has also assumed it can hold its U.S. share at 21 percent. To do that in a flat or slumping market, it will have to lure customers from entrenched rivals like Toyota and Honda.

JUST HIT HOME RUNS

GM executives say they understand the pressure they face.

"This is not the time for niche vehicles," Lutz told reporters this week. "We can't afford to hit singles and bunts. We need triples and home runs."

GM's product revival plan centers on its mass-market Chevy brand, which will get the new Cruze small car, the next generation of the Aveo subcompact and, by 2010, the all-electric Volt.

Moody's Investors Service, which warned this week it could cut GM's credit ratings further into junk territory, said the automaker would struggle to make up for lost profits on trucks with cars that have been priced at a discount to the offerings of Asian rivals.

"GM will likely face a sizable cash burn until it gets this part of the equation right," Moody's analyst Bruce Clark said.

But in the short-term, others have concluded that the risk of failure has dropped for a manufacturer once seen as synonymous with the health of the U.S. economy.

The cost to insure GM's debt for five years with credit default swaps fell to 35.5 percent on Thursday. That is down from nearly 38 percent earlier in the month, when a Merrill Lynch analyst said a bankruptcy filing by the company was "not impossible."

But Kip Penniman, automotive high-yield bond analyst at KDP Investment Advisors, said the restructuring had made the automaker's senior notes attractive. "The odds favor GM's survival outside of bankruptcy," he said.

Morgan Keegan bond analyst Pete Hastings said GM had shown it can build well-received cars, but needs some help from a recovery in industrywide sales that are now bumping along at the lowest level in a decade.

"When the market rebounds, they have the opportunity to return to profitability if they execute on their new car strategy," he said. "Market volumes need to improve substantially for that to happen."

CNW Research estimates that the auto industry is on track to post losses of $276 billion this year on U.S. vehicle sales as the market drops to near the 15 million level, below the 16.2 million units needed to make it profitable.

(Additional reporting by Poornima Gupta in Detroit and Karen Brettell in New York; Editing by Lisa Von Ahn)