Shares of General Motors have hit their lowest level since 1955 and dragged down US auto sector stocks after Goldman Sachs cut the struggling US industry's largest manufacturer to a "sell" rating and warned it would have to raise capital.
The panicky slide in GM shares capped a period of growing concern about liquidity risks to US automakers and suppliers from a domestic auto market reeling from record gas prices and the impact of a housing slump and tighter credit.
The Goldman Sachs warning, including the unusual "sell" call on the US auto industry's largest player after a period of sharp stock price declines just ahead of the close of the second quarter, prompted selling across the sector.
GM Chief Executive Rick Wagoner said the embattled automaker had enough liquidity to carry it through the year and had financial flexibility beyond that.
"We've got a very good, solid funding base under any scenario we see, solid through the end of this year," Wagoner told reporters after an economic event hosted by US presidential candidate Barack Obama. "We have a lot of options to fund beyond that."
Chrysler, for its part, denied rumours it was facing a cash crunch or that it had been driven to filing for Chapter 11 bankruptcy. Those rumours had driven down loan prices for the privately held automaker, according to Reuters LPC.
"The rumour is without merit," Chrysler spokesman Dave Elshoff said. "There is no basis for the rumour."
Debt and equity markets were affected by growing concern for the deepening risks for the auto sector. The cost to insure the debt of GM and Ford Motor hit records.
GM shares were down nearly 11 per cent in early afternoon trade and touched a low of $US11.21.
Major GM suppliers were also hammered. Shares in American Axle & Manufacturing Holdings, which supplies axles for GM trucks, dropped 12 per cent. Lear, downgraded to a "sell" rating by Goldman, tumbled 18 per cent.
Shares in Ford, which had its price target cut by Goldman, dropped almost 5 per cent.
With the Thursday price fall, GM's market cap fell to less than $US6.5 billion. The company has the smallest market capitalization in the Dow Jones industrial average, of which it has been a component since 1925.
Next above GM in terms of market value in the Dow is Alcoa, with a market cap of about $US30 billion. Walt Disney's cap is 10 times GM's at about $US60 billion and Exxon Mobil is the leader at about $US460 billion.
GM shares have lost 38 per cent over the last month as more evidence has piled up that US auto sales weakened further in June, raising doubts about the prospect for the second-half recovery that GM and other major automakers had anticipated.
Fitch Ratings on Wednesday cut debt ratings on GM and Chrysler ratings deeper into the "junk" category," citing the fallout from weaker sales and high gas prices.
Fitch also said it would review Ford ratings over the next six weeks, which could also result in a downgrade.
CASH BURN RAISES CONCERNS
All three US automakers, which have been hardest hit by the collapse in demand for pickup trucks and SUVs, have faced scrutiny in recent days over whether they have sufficient liquidity to ride out the current downturn.
Billionaire investor Kirk Kerkorian, who has invested about $US1 billion in a contrarian bet on Ford, has offered to provide more capital to support the automaker's turnaround.
Kerkorian's chief auto adviser, Jerry York, said on Wednesday that he did not expect the US auto market to bounce back in the second half of this year with an only limited rebound in 2009.
Earlier this week, Chrysler drew down a $US2 billion credit line from Cerberus and Daimler AG, the German car maker that sold off a roughly 80 per cent stake in Chrysler to Cerberus last year.
Under terms of the sale, Chrysler had until August to draw on the credit line, which included $US1.5 billion from Daimler. The credit line pays interest fixed at 7 percentage points above the London interbank rate, Daimler has said.
Chrysler, which lost $US1.6 billion in 2007, has said it ended the year with $US9 billion in cash. Its US sales are down 23 per cent so far this year.
Analysts have also fixed their sights on GM, which ended the first quarter with $US31 billion in cash and undrawn credit. Deutsche Bank and JP Morgan both warned last week that GM would be forced to borrow heavily to shore up its liquidity position.
Goldman Sachs analyst Patrick Archambault, who also cut his ratings on Tenneco, said he expected GM shares to continue to underperform as market fundamentals deteriorate. He cut his six-month price target on GM stock by $US8 to $US11.
"We think GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company's dividend," Archambault said.
What do you think of the new banknotes?Related story: Better, brighter Kiwi banknotes