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20 Jun 2006
Approximately $30 Billion of Debt Affected
New York, June 20, 2006 -- Moody's Investors Service assigned a B2 rating to the secured tranches
of the amended and extended secured credit facility of up to $4.5
billion being proposed by General Motors Corporation (GM), affirmed
the company's B3 corporate family and SGL-3 speculative grade
liquidity ratings, and lowered its senior unsecured rating to Caa1
from B3. The rating outlook is negative. The downgrade of
the unsecured rating concludes a review that was initiated on May 5th
when GM announced the possibility of granting security to its bank lenders.
The ratings of General Motors Acceptance Corporation (Ba1 - under
review for possible downgrade), and Residential Capital Corporation
(Baa3 and Prime-3 -- under review for possible downgrade)
The assignment of a B2 rating to the secured credit facility (one notch
above the B3 corporate family rating) reflects Moody's view that
the borrowing base provisions of the proposed facility, in combination
with the assets upon which lenders will have a first priority lien,
would afford secured bank lenders with materially improved asset protection
and recovery prospects relative to unsecured lenders. Assets included
in the security package include certain US receivables and inventory,
certain Canadian receivables and inventory, certain Canadian property
plant and equipment, and 65% of the shares of Controladora
GM -- the parent company of GM's profitable Mexican operation
General Motors de Mexico.
The downgrade of the unsecured debt reflects the diminution in the asset
coverage that would be available to this class of creditors as a result
of the granting of security to certain bank lenders. Moody's
notes that under the terms of the proposed amendment and extension,
lenders who vote in favor of the amendment will receive security in exchange
for extending the maturity of their commitment to 2011, while lenders
not voting in favor of the amendment will retain the original maturity
date of June, 2008 but will remain unsecured. The rating
agency said that any unsecured tranches of the credit facility would be
rated Caa1, equivalent with the company's other unsecured
The affirmation of GM's B3 corporate family rating reflects Moody's
view that the granting of security to its bank lenders does not fundamentally
alter the company's overall credit risk or expected loss profile.
Rather, with expected loss representing the probability of default
times the degree of loss experienced in the event of default, the
granting of security represents a redistribution of the loss-given-default
component among secured and unsecured lenders.
Moody's plans to supplement its traditional assessment of expected
loss with a proposed Loss-Given-Default (LGD) Methodology
for which a request for comment was circulated during January 2006.
Research by Moody's suggests that the realized credit losses on
loans have tended to be lower than losses on similarly rated bonds.
Moody's research further suggests that the application of a rigorous
estimation model for LGD could support a higher degree of up-notching
for bank facilities than has been the case with Moody's traditional
notching methodology which ascribes considerable importance to asset coverage.
Upon the implementation of its LGD methodology, Moody's will
adjust the ratings of GM's secured credit facility accordingly.
GM's negative outlook reflects the considerable near- and-intermediate-term
operating challenges the company continues to face. These include
achieving a successful reorganization of Delphi, completing the
sale of a majority interest in General Motors Acceptance Corporation (GMAC),
stemming its share loss in North America, and achieving a 2007 UAW
contract that affords material relief from its current health care obligations
and jobs bank program.
Ensuring adequate liquidity is a critical element in GM's strategy
for contending with these operational challenges. The company's
sizable liquidity position of approximately $22 billion in cash
and short-term VEBA could benefit from the $10 billion in
up front proceeds from the GMAC sale and from establishing an accessible
credit facility of up to $4.5 billion.
"The recent extension of the GM-Delphi buyout program helps
to lessen the likelihood of a strike at Delphi and is a modestly positive
development on the operational side. Similarly, the company's
ability to put an accessible credit facility in place would be a modest
enhancement of its liquidity profile," said Bruce Clark,
a senior vice president with Moody's. Despite these potentially
positive developments, GM continues to face formidable intermediate-term
challenges. "GM still has a long road ahead of it and there
isn't much likelihood of positive movement in the rating until the
company can stem its loss in market share, show that it can preserve
the profitability of its new line of large trucks and SUVs, achieve
a viable UAW contract in 2007, and get on track for generating positive
free cash flow for 2007," Clark said.
General Motors Corporation, headquartered in Detroit, Michigan,
is the world's largest automotive manufacturer.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S ASSIGNS B2 RATING TO GM'S PROPOSED SECURED CREDIT FACILITY, LOWERS UNSECURED RATING TO Caa1. OUTLOOK IS NEGATIVE.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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