Bankruptcy News
Sharp petrol hike on the cards
18 June 2009

JOHANNESBURG ( - Consumers should brace themselves for a steep fuel price hike in July.

This is because the daily under-recovery of fuel has slipped to an average of 43.7c per litre for unleaded petrol and 37.1c/l for diesel in the first half of June.
GM to file for bankruptcy

01 June 2009

DETROIT / WASHINGTON ( - General Motors Corp will file for bankruptcy on Monday, US officials said, forcing the 100-year-old carmaker once seen as a symbol of American economic might and dynamism into a new and uncertain era of government ownership.

The planned filing, confirmed by Obama administration officials, would be the third-largest in US history and the largest-ever US manufacturing bankruptcy.

The decision to push GM into a fast-track bankruptcy, and provide $30 billion of additional taxpayer funds to restructure the company so it can better compete with lower-cost Asian automakers, is a huge gamble for the Obama presidency.

But the administration saw few other options at a time when the jobless rate is soaring, given that GM employs 92 000 in the United States and is indirectly responsible for 500 000 retirees.

The filing in a federal court in Manhattan is expected before US markets open and caps a three-decade-long decline for the Detroit automaker that ended in outright crisis after the weak global economy, high oil prices and tight credit slammed sales and left it unable to raise cash.

"Now the hard part begins, which is making GM and Chrysler competitive. If they don't do that, then we'll be doing this all over again in a few years," said Christopher Richter, auto analyst at CLSA Asia-Pacific Markets in Tokyo.

"The immediate implication is that the companies are going to get smaller and so market share is up for grabs, which means that rivals like Toyota, Honda, Nissan and Hyundai are going to gain share."

The lifeline

Since the start of the year, GM has been kept alive with US government funding as a White House-appointed task force vetted plans for a sweeping reorganisation that will be undertaken with $50 billion in government financing.

By preparing to take a 60% stake in a reorganised GM, the Obama administration is gambling that the automaker can compete with the likes of Toyota Motor Corp after its debt is cut by half and its labor costs are slashed under a new contract with the United Auto Workers (UAW) union.

The governments of Canada and Ontario agreed to provide another $9.5 billion to GM in a late addition to the plans for the bankruptcy that have been taking shape for weeks, senior US officials said.

The plan as detailed by US officials is for a quick sale process in bankruptcy court that would allow a much smaller GM to emerge from court protection in as little as 60 to 90 days.

GM plans to close 11 US facilities and idle another three plants. It has not provided an update target for job cuts but had been looking to cut 21 000 factory jobs from the 54 000 UAW workers it now employs in the United States.

The UAW would have a 17.5% stake in the "new GM." The Canadian government would own 12% stake and GM bondholders would get 10%.

Reluctant investor

Officials involved in the planning for GM said the White House was a "reluctant investor" in GM but had to prevent a liquidation that analysts say would have cost tens of thousands of jobs at a time when the economy is mired in recession.

Analysts said while there were high risks to the Obama administration's approach, it had succeeded in pulling GM back from the brink of collapse.

"I think they have a much greater chance of emerging as a healthy company now than they did just six months ago," said Aaron Bragman, an analyst at IHS Global Insight. "Nobody gave them any possibility of emerging as a whole company."

President Barack Obama is due to speak on the car industry and the GM situation shortly before noon Eastern time on Monday. A news conference by GM chief executive Fritz Henderson will follow.

US officials said there was no plan to provide any further funding for GM and insisted that the US industry could support all of the Detroit Three.

The administration said the goal of the restructuring was to help GM be profitable in a year when the industry sells 10 million vehicles, versus the 16 million it sold in 2007.

The task force is led by Wall Street investment banker Steven Rattner and labor negotiator Ron Bloom, and includes top White House adviser Lawrence Summers and US Treasury Secretary Timothy Geithner.

A federal judge could approve the sale of Chrysler's best assets to a new company led by Fiat SpA as soon Monday. Ford Motor Co has not sought any emergency federal aid.

"We do believe, and completely endemic in the president's decision, was a belief that this country can support three domestic successful viable auto companies," a senior Obama administration official said.

Even if GM and Chrysler emerge swiftly from bankruptcy this summer, the autos task force will stay in business - shifting to an investment manager role.

Senior administration officials said on Sunday there was plenty to keep the task force staff busy, monitoring the government's stake of about 60% of GM, and less than a 10% stake in Chrysler.

Carefully orchestrated failure

GM's bankruptcy is the most carefully orchestrated Chapter 11 filing in the history of American business.

The carmaker's final descent started with President George W. Bush administration's emergency aid announcement on Dec. 19 and accelerated in late March when the Obama government gave it 60 days to restructure.

While the "new GM" is expected to emerge quickly from court protection, the carmaker's shuttered plants, stranded equipment and other spurned assets would be left to liquidation in bankruptcy.

Al Koch, a managing director at advisory firm AlixPartners LLP, will be appointed chief restructuring officer in charge of liquidating those GM assets.

A veteran restructuring adviser, Koch has had prominent roles in Kmart Corp's restructuring and other turnarounds.

Over the weekend, GM won support from investors representing 54% of its $27 billion in bondholder debt offered their support for the US government's plans.

Bondholders could take up to 25% of GM if it recovers to be worth what it was in 2004, before it began round after round of cost-cutting in what proved to be a failed bid to make up for lost sales.

The bondholders' support does not ensure court approval but gives the company an important symbolic victory that bankruptcy experts and analysts say will help GM's case.

Obama said in an interview with NBC aired over the weekend that the government was forced to take over GM in order to prevent a collapse that could have brought down other companies and further batter the recession-hit US economy.

"My preference would have been to stay out of it completely," Obama said.

In the past week, GM has also concluded an amended agreement with the United Auto Workers union under which the UAW will receive a 17.5 percent in a restructured company and other debt and preferred stock instead of $20 billion in cash.

The UAW also made concessions last week that some say mark a fresh blow to the once common, well-paid manufacturing jobs that created America's middle class.

Founded in 1908, GM rose to dominate the US and global car industries under the stewardship of pioneering chief executive Alfred Sloan, who famously pledged the carmaker, would deliver "a car for every purse and purpose."

By the mid-1950s, at the peak of its success, GM had some 514 000 employees. It accounted for about half of US new car production and its sales were twice as large as the No. 2 corporation, Standard Oil.

GM's stock fell to 75 cents on Friday, a level last seen during the Great Depression on what was expected to be its last trading day before bankruptcy.

Porsche facing bankruptcy?

26 May 2009

JOHANNESBURG ( - Porsche’s cavalier attempt to obtain a majority stake in VW has left the company so heavily in debt it may be on the brink of bankruptcy.

The celebrated German sports car manufacturer acquired a 51% share in VW earlier this year in a raft of derivate deals which tripled Porsche’s debt position to €9bn.

VW was not exactly privy to a takeover and the deal has gone badly wrong, forcing Porsche to settled for a merger instead.

Currently the fabled performance car maker is deflecting all talks of bankruptcy, despite admitting yesterday it had borrowed some €700m from VW to meet its operational and debt servicing requirements after nearly being forced to the brink in March.

Porsche admitted the company finds itself in a state of affairs which necessitates urgent funding. "We are still lacking €1.75bn. We are negotiating with several banks, including the KfW (state development bank)," said a spokesman.

Representatives from Porsche are understood to also be in talks with the Bank of Tokyo for a €750m loan, and are seeking help from the regional government of Baden-Wurttemberg.

The case for government intervention is exceedingly tenuous though, as Porsche’s undoing has been wholly self inflicted and not as result of industrial action or falling sales.

With an election in September, the German government’s primary concern is surely the future of Opel and its voting workforce, not providing a soft landing for Porsche's financial misadventures.

Porsche’s announcement of the €700m VW loan shaved 3.1% off the Zuffenhausen based company’s share price.

Porsche founder Ferdinand Porsche shows a model of the Porsche 356 No. 1 to his grandchildren Ferdinand Piëch (right) and Ferdinand Alexander Porsche in 1949. Piëch was CEO of Volkswagen AG until 2002 and is currently chairman.

Is it the boss or the chairman's fault?

Despite Porsche CEO - and allegedly Europe's best paid executive - Wendelin Wiedeking’s prolificacy in managing the company’s design and engineering to become the world’s most profitable auto maker per car sold, it seems a long brewing family feud has nearly proved Porsche's undoing.

Legendary engineer, former VW boss, Ferdinand Piech (currently Wolfsburg’s chairman), has frustrated his cousin, and Zuffenhausen chairman, Wolfgang Porsche’s ambition for a takeover.

Piech is allegedly concerned about VW employees job security in the wake of a Porsche (company) take over, whilst Porsche (Wolfgang) is seemingly intent on realising his family's long-standing ambition of finally gobbling up VW.

In the meanwhile, Porsche has nearly been left floundering.

Joburg insolvency claims 'fall flat'

20 April 2009

JOHANNESBURG (Business Day - I-Net Bridge) - LAST week, the Democratic Alliance (DA) alleged that the city of Johannesburg was technically insolvent. Even in the inevitably heated run-up to the elections, the claim was a dramatic one, not least because Johannesburg really did face financial bankruptcy about 12 years ago.

Most local government veterans will recall the disastrous state of the city’s finances in the late 1990s, when it was unable to meet its bills for bulk utilities, requiring provincial intervention and a comprehensive restructuring of the city’s organisational and managerial systems. But since that troubled time and working hard to reach ambitious targets, the city has been rated as one of the country’s top municipalities, by analysts and rating agencies alike.

The DA’s allegations of imminent financial collapse rested on a rather technical ratio of assets against liabilities (at a ratio of 0,71:1). Current or liquidity ratios reflect an organisation’s ability to pay back short-term liabilities with short-term assets. The higher the ratio, the more capable the organisation is of paying its obligations and hence, a ratio less than 1 suggests that if all obligations were due at the same time, an organisation would have difficulty paying its debts. Although potentially a serious concern, bankruptcy is not inevitable, and a high liquidity ratio is not necessarily inherently good or bad either. The local government norm (as defined by the auditor-general) is considered low in the text-book scenario (1,2:1), but compared with modern financial management models, ratios less than 1 can represent a defensible and desirable cash-flow management practice, where payment to creditors is delayed longer than payment by debtors (as is the case in Johannesburg). For residents, this means that cash is released sooner into the city’s budget: an advantageous outcome given that the city’s solvency ratio (total assets to total liabilities) is a solid 1,91:1.

In fact, few auditors would look at any ratio in isolation. So what then should concern residents who want to be assured of their city’s solvency? The first key issue is audit opinion. The auditor-general awarded Johannesburg an unqualified audit for the year ending in June last year, following one the previous financial year, suggesting accuracy in the city’s reporting and no areas of especial concern. Second, other key indicators should be considered. These include revenue and expenditure growth, which Johannesburg augmented by 14% and 19%, respectively. With capital expenditure growing by 17% to R4,1bn, accelerated delivery of some large and noticeable projects should be on the cards (demonstrated, for instance, by the Bus Rapid Transit system that is under construction). With these capital projects and an increase in cash and investment balances (to R4,2bn), the city’s finances, far from perilous, look downright healthy.

In terms of a balanced budget, the city’s in year quarterly report suggests there is little cause for alarm. For the year to date (first and second quarters of 2008-09) actual operating expenditure at just less than R10bn is within the range of operating revenue at R9,7bn.

What else then should concern residents? The DA suggested that financial trouble was afoot due to the introduction of a new billing system, which reached only about 28% of sectional title residents. This is a serious concern but the city has responded that it achieved an annualised collection rate of 91% from March last year to February and that there has been engagement with sectional title owners, who represent less than 7% of its revenue base.

Given the city’s hard work to rebuild its reputation after its financial collapse 12 years ago, the allegation of insolvency is unfair without this context and record of success and, coming from a councilor of the city itself, somewhat irresponsible. But the slow response by the city is also cause for concern; no matter how spurious the allegations, it is very surprising that the spin-doctoring machine failed to swing into action immediately to publicly address what can only be considered a rather raw nerve for Johannesburg, even if it required a little elaboration of accounting principles.

Perhaps the issue and challenge then is to meaningfully translate accounting ratios and principles into a language with which all stakeholders can engage.

nHeese is the economist at Municipal IQ, a web-based data and intelligence service. Kevin Allan is Municipal IQ’s MD. Paul Allan is a chartered accountant.

GM bankruptcy 'wouldn't affect GMSA'

09 April 2009

JOHANNESBURG (BuaNews) - The possible bankruptcy of US automotive giant General Motors would have minimal impact on General Motors South Africa (GMSA), as the local unit generated its own cash and was responsible for its own viability, the company said this week.

"We are responsible for funding our own operations and do not rely on any direct financial support from North America," GMSA MD Steve Koch said in Johannesburg.

Given the small overlap of product portfolios between GMSA, the North American market and the financial independence under which GMSA operated, there were few implications for the South African market, he added.

"Approximately 95% of GMSA's total sales were derived from markets outside North America," Koch said.

Continued commitment, investment

Customers could also be assured that GMSA would continue to honor its warranty and after-sales commitments. "South Africans don't need to worry as we will live up to our warranty," he said.

While GMSA sourced many components for assembly from local suppliers, Koch said the majority of Isuzu components were sourced from Japan and Thailand and Corsa Utility components from Brazil, while the Chevrolet products were imported from Korea and Australia.

Each of these locations had their own design and engineering capabilities and operated independently from North America, he said.

Koch added that the company has continued to invest in its distribution infrastructure, including a new R150-million vehicle conversion and distribution centre and a new R220-million pan-African parts distribution centre at the Coega Industrial Development Zone set for construction early in 2010.

Decline in sales

Koch said that during the course of 2008, the company had made significant changes in line with the deterioration in vehicle sales, and had begun a reorganisation of its business in May.

The National Association of Automobile Manufacturers of SA reports that new vehicle sales dropped 30.3% year-on-year in March, despite recent interest rate cuts. Sales of vehicles exported from South Africa to the flailing US, Japanese and European markets also continue to slump.

"Unfortunately the market deterioration has continued into 2009 to the point where we have no other option but to contemplate forced retrenchments," Koch said.

Last week GMSA indicated it would retrench 700 workers. Current job losses are estimated at more than 35 000 people in the automotive industry in South Africa.

Motor industry assistance

Meanwhile, the government has tasked an auto industry task team to draft a strategy aimed at assisting the local industry. It is expected to present its proposals to Trade and Industry Minister Mandisi Mpahlwa during the course of this month.

Since 2005, General Motors in the United States has lost more than R800-billion and has been kept afloat by an emergency loan of R130-billion from the government.

It has requested a further R160-billion from the US government. However, chances of a government bailout of GM in the US took a knock after the White House determined that its turnaround plan was too vague.

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