Tuesday, July 22, 2008

NYU Prof: General Motors, Ford Could Go Bankrupt

General Motors Corp. and Ford Motor Co. could go within five years, according to Edward Altman, a finance professor at New York University's Stern School of Business, Bloomberg is reporting.

"Both are in very serious shape and the markets reflect that,'' Altman, the creator of the Z-score mathematical formula that measures bankruptcy risk, said in an interview with Bloomberg Television. The model shows that these companies are ``on the verge of bankruptcy," he said.

The Z-scores for GM and Ford give both a bond rating equivalent to a CCC ranking, though GM is in slightly worse condition than Ford, Altman said.

"The thing that triggers a default in almost all cases is running out of cash and not being able to refinance,'' Altman told Bloomnerg."You're not going to go bankrupt as long as you can refinance short-term liabilities. You will go bankrupt if you can't."

GM Chief Executive Officer Rick Wagoner said in an interview July 15 that the company has the ability to raise cash, and he called bankruptcy ``a bad idea.'' Ford has said it had access to $40.6 billion in funds as of March 31, including credit lines.

"I would not put money with GM right now because the downside is so great relative to the upside, relative to the yield,'' said Altman, speaking in New York. ``Your downside is probably 60 percent on the debt. The risk reward ratio is pretty poor."

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