Mike Shedlock

Going into debt to fund pensions seems like a ridiculous thing to do, especially for a company had a chance to shed more of those pension obligations in bankruptcy.

Please consider the Wall Street Journal story GM Wants to Up Credit Line

General Motors Co. is in preliminary talks with banks to potentially double its $5 billion line of credit as the auto maker looks to strengthen its balance sheet and shrink pension obligations, according to people with knowledge of the discussions.

The world's largest auto maker by sales is in no danger of running short on cash. The Detroit company has very little debt and held about $33 billion in available cash at June 30. Analysts believe it needs roughly $20 billion to operate comfortably. It currently has an available line of credit of $5 billion.

But GM could have hefty cash needs ahead. Its European operations are racking up major losses, it is increasing capital spending on new vehicles, and it may want to repurchase shares held by the U.S. Treasury. GM also wants to reduce its U.S. pension obligations. Pensions for hourly, union workers and retirees are underfunded by about $10 billion and have been a major concern for investors.

GM is spending around $4 billion to shift responsibility of its $26 billion salaried retiree pension program to Prudential Financial Inc. PRU +1.52% in a deal set to close by year-end. A bigger drag on the company is the $71 billion in pension obligations it has to union-represented hourly workers and retirees. That account is underfunded by $10 billion, according to public filings.

GM's Pension Liabilities

On June 1, 2012 the Chicago Tribune reported GM to cut about one-fourth of U.S. pension liability
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Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.

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