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06 Apr 2001
MOODY'S CONFIRMS RATINGS OF GM AND GMAC BUT CHANGES OUTLOOK TO NEGATIVE; LONG-TERM AT A2 AND SHORT-TERM AT PRIME-1
Approximately $130 Billion of Debt Securities Affected.
New York, April 06, 2001 -- Moody's Investors Service confirmed the A2 long-term and Prime-1
short-term ratings of General Motors Corporation (GM) and General
Motors Acceptance Corporation (GMAC), but changed the rating outlook
to negative from stable. The change in outlook reflects the near-term
challenges that GM will face in addressing: 1) the continuing erosion
in its domestic market share position; 2) intensifying competition
from German and Japanese manufacturers in the U.S. truck
and SUV markets; and, 3) the severe weakness in its international
operations. To the extent that GM cannot effectively address these
challenges, the company's operating performance, cash generation,
and debt protection measures would be lower that we originally anticipated
during any slowdown in the U.S. automotive industry.
These measures would also be less robust than anticipated during any subsequent
recovery. Such a reduced level of peak-to-trough
performance might not be supportive of the current rating level.
Although the U.S. automotive market may be entering a cyclical
slowdown, this factor is not a material contributor to Moody's revision
of GM's outlook. The rating agency noted that GM's current level
of financial flexibility is stronger than in 1989 - the year just
prior to the last major downturn in the U.S. auto sector.
From 1989 to 1991, total U.S. light vehicle shipments
fell by 16% from 14.9 million units to 12.5 million.
Moody's currently anticipates that shipment levels could fall by about
10% during 2001. Going into this weaker environment,
GM's net liquidity position (including VEBA assets) is $3.5
billion, compared with about $0.4 billion in 1989;
its global pension plan is almost fully funded compared with an $7
billion under funded position in 1990; and, the company has
made considerable progress in reducing the level of contributions that
must be made to its pension and benefit plans. Moreover,
the $7 to $8 billion market value of the company's approximately
30% economic ownership in Hughes Electronic affords the company
with an additional degree of liquidity. GM has made considerable
progress in improving the cost structure of its U.S.-based
manufacturing facilities on an absolute basis, and relative to other
domestic operations. It has also made steady progress in lowering
its breakeven point.
The principal reason for the change in outlook reflects Moody's concern
about GM's ability to maintain its competitive position, particularly
in the U.S. Since 1989 its U.S. market share
has steadily fallen from 34.6% to 27.8%.
This decline has been driven largely by the company's inability to address
aggressive competitive challenges from Japanese and European manufacturers
in the small, medium and luxury car segments. Much of GM's
recovery subsequent to the 1990/91 downturn was due to the growth in the
light truck and SUV markets, and the company's ability to significantly
shift its mix of unit sales away for cars and toward light trucks/SUVs.
During this period, however, GM did not face significant international
competition in this segment. Due to attractive growth prospects
and high margins in the truck and SUV sector, Japanese and European
manufacturers are now aggressively targeting these categories, and
GM's truck and SUV operations will face many of the competitive challenges
that have eroded the company's position in the U.S. car
Moody's also noted that going into the 1990/91 downturn, GM's international
operations were a significant source of earnings and cash flow.
They contributed approximately $2.0 billion in annual net
income during 1990 and 1991. For 2000 they lost approximately $500
million (prior to restructuring charges of about $400 million),
and the intense competitive environment in Europe and South America will
likely result in continuing losses for 2001.
The challenges GM faces have already dampend the strength of its recent
operating performance. During 2000, the operating profit
margin of its automotive business (excluding GMAC), was a modest
2.1%, down from 5.0% in 1999.
In addition, free cash flow during 2000 (after working capital,
capex, and dividends) approximated a negative $400 million.
This compares with free cash flow of about $300 million in 1999
(prior to impact of the Delphi spin off). This level of performance
is weak for the A2 rating level and could erode further due to a more
intense competitive environment.
During the next 12 months Moody's assessment of GM will focus: 1)
the company's ability to contend with more intense head-to-head
competition with Japanese and European manufacturers in the truck and
SUV market; 2) the degree to which the company can stabilize its
overall market share position in the U.S; 3) the extent to
which it must rely on incentives to move product; and, 4) the
likelihood that it will be able to materially reduce the pace of share
erosion and operating losses in its international businesses.
We expect that GMAC's size and competitive position will enable it to
provide critical support for GM's retail and wholesale shipments.
This support could take on added importance during a cyclical downturn.
GMAC has manageable asset quality, a liquid balance sheet,
earnings diversification through its mortgage and insurance operations,
and improving leverage. The company also benefits from excellent
access to the asset-backed securities market for its auto receivables.
GMAC does not have the benefit of a formal support agreement with GM.
Nonetheless, the A2 long-term rating and outlook reflect
the close business relationship between the companies, GM's direct
ownership and management control of GMAC, and the potential for
business trends at GM to have a direct impact on GMAC's performance.
We anticipate that the ratings of the two companies will remain closely
General Motors Corporation, headguartered 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
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
J. Bruce Clark
Senior Vice President
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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