General Motor's Renaissance Center headquarters, in downtown Detroit.
As General Motors prepares to launch its critical rebirth as a public company the papers it filed with federal regulators, this week, reveal last year’s bankruptcy didn’t solve all of the maker’s financial woes in its home market.
In the S1 form the maker filed with the U.S, Securities Exchange Commission, this week, GM disclosed its U.S. Hourly Pension Fund is underfunded by more than $17.1 billion. In addition, the company potentially could owe even more money to the Voluntary Employees Benefit Association, or VEBA, controlled by the United Auto Workers, GM said.
The company’s pension funds have historically been “well managed and even had surplus cash between 2005 and 2007,” it claimed in the filing for its planned IPO. But a host of factors, in the wake of the financial crisis in 2008 and 2009, have resulted in a decline in assets, according to the documents filed with the SEC.
GM cautioned that, “Our U.S. defined benefit pension plans are currently underfunded, and our pension funding obligations may increase significantly due to weak performance of financial markets and its effect on plan assets. The GM Pension plans, also have been hurt by the prevailing low interest rates.”
GM also owes another $10 billion to its non-U.S. pension fund, according to the S1.
The disclosures about the pension fund were included in the long list of potential problems the automaker listed inside the lengthy and complicated S1 to alert investors to the fact that shares in the new GM could be a risky investment.
Recession, a drop in the company’s cash flow or financial difficulties at key suppliers and partners also are serious threats, according to the documents.
GM, however, also said it believes part of its long-term strategy, which includes a commitment to new technology, a competitive post-bankruptcy cost structure in North America, a strong presence in emerging markets and the commitment to producing a broad portfolio of excellent vehicles will all sustain the company in the future.
The S1, which will serve as the basis for potential investors in the new GM to evaluate the possible risks and rewards, also emphasizes that the maker is in a strong position in the world’s biggest emerging markets, notably China and Brazil.
“We believe that this expected growth in emerging markets, combined with an estimated recovery in mature markets, creates a potential growth opportunity for the global automotive industry,” GM noted. IIHS Global Insight forecasts global vehicle sales to increase at a compound annual growth rate of 6% from 2009 to 2015 when global vehicle sales could reach as high as 95 million and 100 million units.
The automotive industry is cyclical and tends to track changes in the general economic environment. OEMs that have a diversified revenue base across geographies and products, and have access to capital, “are well positioned to withstand industry downturns and to capitalize on industry growth,” according to GM’s filing.
In China, the fastest growing global market on a unit volume basis, GM laid claim to having the number one market position with a share of 13.3% in 2009. The S1 also noted General Motors held the third largest market share in Brazil, at 19%, in 2009.
GM’s SEC filing has left a number of unanswered questions – including the exact date of the offering and the amount of the government’s stake that will be auctioned off. Currently, the U.S. Treasury holds a 60.8% share of the “new” GM, but the White House has been pressing the company to draw that stake down as quickly as possible.
The challenge will be to get investors to pay what would work out to at least $113 for each of the government’s nearly 360 million shares – the minimum needed, before working in underwriting fees – to recover the full cost of the $41 billion bailout.
Sen. Carl Levin (D-Michigan), one of the company’s major political supporters, said he sees GM’s IPO as an important milestone.
“This is another important step in GM’s rebound and in the recovery of the domestic auto industry. A successful IPO will be even more evidence that the steps the government took in 2008 and 2009 were good for workers, good for Michigan and good for the nation. I’m optimistic this success story is going to keep getting better.”
The success – or failure – of the GM IPO, say industry observers, will likely have a strong influence on the plans for a public offering by Chrysler, which eventually must dispose of a smaller but still significant government stake.