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14 Feb 2005
Approximately $150 Billion of Debt Affected.
New York, February 14, 2005 -- Moody's Investors Service confirmed the Baa2 long-term rating
of General Motors Corporation (GM) and the Baa1 long-term and Prime-2
short-term ratings of General Motors Acceptance Corporation (GMAC),
but changed the outlook of both companies to negative from stable.
The change in outlook follows the announcement that GM has agreed to pay
Fiat S.p.A. 1.55 billion to terminate
the Master Agreement between the companies and to realign their industrial
relationships. Although the 1.55 billion payment does
not represent a significant erosion in GM's automotive liquidity
position of $23 billion, this outflow comes as the company
is facing increasing challenges in its competitive and operating environment.
These challenges include the continued erosion in its North American market
share position (26.2% for January 2005), still-high
domestic inventory levels, elevated shipments to the daily rental
segment, US incentive levels that remain elevated, and more
negative prospects for the company's burdensome health care costs.
The negative outlook reflects Moody's view that this more stressful
environment, in combination with the 1.55 billion Fiat
transaction, will result in credit metrics that remain weak for
the Baa2 level through 2006. In its ongoing assessment of GM's
rating and outlook, Moody's will focus on the company's
ability to remain on track for delivering more appropriate debt protection
measures by 2007 as a result of various new product and cost cutting initiatives.
In order to more solidly support the Baa2 rating, GM's credit
metrics should approximate the following by 2007: EBITA margin should
exceed 4%; fixed charge coverage should be in the 4.0
to 4.5 times range; retained cash flow to net total debt should
exceed 50%; and free cash flow to total debt should be greater
than 15%. For 2004, GM's metrics approximated
the following: EBITA margin of less than 1%; fixed charge
coverage below 2 times; retained cash flow to net debt moderately
in excess of 35%; and, free cash flow to total debt
of about 10%.
GM is undertaking a number of initiatives that could enable it to strengthen
its performance from the weak levels that will be generated during 2005.
These initiatives include: 1) a much more robust new product cadence
in the US during late 2005 and continuing through 2007; 2) the continuation
of a healthy new product cadence in Europe during 2005; and,
3) the achievement of approximately 500 million in annual cost savings
due to the elimination of up to 12,000 employees as part of its
Europe restructuring. During the next twelve months Moody's
expects to track GM's progress in implementing these initiatives
and in laying the groundwork for stronger performance during 2007.
Moody's near-term assessment of GM's prospects for
sufficiently strengthening its 2007 performance will consider the company's
ability to: 1) maintain US market share above 27% without
relying on increased incentive levels; 2) demonstrate solid customer
acceptance of the products launched during late 2005 in both the US and
Europe; 3) reduce US inventory levels; 4) wean itself from a
relatively high dependence on the US daily rental market; and 5)
effectively restructure and strengthen its European operations as it unwinds
the three-year-old joint venture with Fiat.
Moody's change of GMAC's outlook to negative reflects the significant
business ties between GM and GMAC that influence GMAC's origination volumes,
asset mix, and asset quality. GMAC's outlook change did not
result from a change in Moody's views regarding GMAC's intrinsic credit
strength, including its resilient earnings base and strong liquidity.
GMAC has appropriately evolved its funding profile by lengthening debt
maturities and by tapping new sources of funding, taking advantage
of the liquidity and high quality of its finance and mortgage assets.
An important consideration in the rating differential between GMAC and
GM is the expectation that GMAC's unsecured creditors would have superior
asset recovery experience relative to the unsecured creditors of GM if
the companies were to come under severe stress. Moody's will continue
to monitor GMAC's capital levels and the relative characteristics of its
pledged and unencumbered assets.
Under the terms of the Fiat settlement, GM will pay Fiat 1.55
billion to terminate the Master Agreement (including the put option) and
to acquire an interest in key strategic diesel engine assets, and
other important rights with respect to diesel engine technology.
Moody's believes that the acquisition of the diesel engine assets
and the related technology rights will enhance the company's strategic
position in the European market by ensuring access to diesel engines.
There is important long-term strategic and economic value to this
component of the transaction. However, the amount paid by
GM to relieve itself of the Fiat put exceeds the rating agency's
expectations and contributes to the negative outlook.
A key consideration in Moody's ongoing assessment of GM is the solid
liquidity of the automotive operations. At year end 2004,
the company had approximately $23 billion in cash, marketable
securities and short-term VEBA. This compares with $32
billion in automotive debt that has an average maturity of approximately
19 years, with about $3 billion maturing during the next
five years. This strong liquidity position affords the company
a critical financial cushion as it attempts to implement its cost cutting
initiatives and its new product program. Moody's notes,
however, that the strength of GM liquidity position and its debt
protection measures are moderated by the company's $54 billion
unfunded OPEB liability.
Moody's also recognizes that GM, despite the operational and
competitive pressures it faces, generated over $4 billion
in free cash flow during 2004. During 2005, free cash flow
could approximate $2 billion prior to the outflows associated with
the European restructuring and the payment associated with the Fiat settlement
General Motors Corporation, headquartered in Detroit, Michigan,
is the world's largest producer of cars and light trucks. GMAC,
a wholly-owned subsidiary of GM, provides retail and wholesale
financing in support of GM's automotive operations and is one of the worlds
largest non-bank financial institutions.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S CONFIRMS Baa2 RATING OF GM AND Baa1/P-2 RATINGS OF GMAC; OUTLOOK CHANGED TO NEGATIVE FROM STABLE.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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