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Rating Action:

MOODY'S CONFIRMS Baa2 RATING OF GM AND Baa1/P-2 RATINGS OF GMAC; OUTLOOK CHANGED TO NEGATIVE FROM STABLE.

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 agreement.

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.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S CONFIRMS Baa2 RATING OF GM AND Baa1/P-2 RATINGS OF GMAC; OUTLOOK CHANGED TO NEGATIVE FROM STABLE.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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