Approximately $30 Billion of Debt Affected
New York, November 01, 2005 -- Moody's Investors Service lowered the long-term rating of
General Motors Corporation (GM) to B1 from Ba2. The outlook is
negative. The Ba1 rating of General Motors Acceptance Corporation
(GMAC) and the Baa3 rating of Residential Capital Corporation remain under
review with direction uncertain. The GM downgrade reflects greater
uncertainty as to GM's ability to implement a comprehensive restructuring
program, stem eroding market share, rebuild North American
profitability, and achieve positive free cash flow quickly enough
to meet the financial metrics previously defined by Moody's for
maintenance of its Ba2 rating. Moreover, factors that could
create additional uncertainty include: risk of supply disruptions
if actions by Delphi to reduce its costs lead to UAW job actions;
potential implications of the recently announced SEC investigations;
and any actions that GM might need to take to address the interests of
The ongoing erosion of GM's competitive position and market share
is evident in the company's significant third quarter operating
loss, which contributed to $6.6 billion of cash consumption
for the nine months ended September 30th. The company anticipates
that the scheduled launch of its new T900 trucks and SUVs will provide
opportunity for improved market share and financial performance.
However, in an environment where consumer preferences are shifting
toward more fuel efficient vehicles, the market acceptance of this
new line of vehicles is less certain, and may not enable the company
to fully recover the considerable investment made to develop, produce
and launch the project.
At the same time, GM continues to face a significant competitive
cost disadvantage because of a burdensome North American wage and benefit
structure within its own operations and those of its major supplier,
Delphi Corporation. While the company has recently reached a tentative
agreement with the UAW to significantly reduce its retiree healthcare
costs, the cash flow benefits of this proposed plan are unlikely
to be realized before 2008. Moreover, further cost reduction
initiatives are likely to be needed in order for GM to achieve a competitive
cost structure in North America. Further restructuring actions
would likely require a large use of cash in order to fund employee separation
costs. Liquidity could be further pressured by continued operating
cash deficits together with any cash payments related to the Delphi reorganization.
A potential offset to these liquidity requirements is GM's plan
to monetize a portion of its GMAC investment, and the B1 rating
anticipates that GM will be successful in selling a majority stake in
GMAC. Dividends received from GMAC have been a major source of
cash to GM and have provided a lift to its credit metrics. The
potential reduction in dividends from GMAC due to a partial sale would
contribute to a longer-term erosion of the company financial profile.
Despite this erosion, the sale plays a critical role in GM's
financial strategy. The transaction will boost liquidity available
to fund GM's operating and restructuring requirements, and
will enhance GMAC's value by improving its capital structure and
funding cost. Consequently, Moody's believes that a
failure to complete the sale would require further adjustment to the company's
strategy and could result in additional downward pressure on the rating.
The negative outlook reflects Moody's view that GM continues to
face a number of near-term challenges that could further pressure
the rating. GM remains vulnerable to any work actions or strikes
that might occur at Delphi as a result of the supplier's attempt
to reduce labor costs. Any interruption of supply arrangements
with Delphi would be highly disruptive for GM. Beyond this,
failure to achieve material incremental labor cost reductions over the
intermediate term could require the company to pursue other strategic
initiatives that could have further negative rating implications.
The SEC inquiry into certain GM accounting practices could distract management's
attention from implementing needed restructuring actions. Moody's
further notes that SEC investigations have, in a number of circumstances,
resulted in various companies electing to delay the filing of their financial
statements, resulting in their inability to comply with lending
agreement covenant requirements. While GM has not indicated any
delay in its financial reporting related to the SEC investigation,
such an event would be viewed negatively from a rating perspective.
Moreover, it would be viewed negatively if developments relating
to the investigation interfered with the company's ability to sell
a majority interest in GMAC.
Moreover, depending on developments in the investigation,
the company's ability to file financial statements in a timely manner
and thereby remain in compliance with covenant provisions of various lending
agreements could be jeopardized. Developments in the inquiry could
also interfere with the company's near-term ability to sell
a majority interest in GMAC.
The company's SGL-1 Speculative Grade Liquidity Rating considers
that as GM contends with market and competitive challenges, it will
benefit from $19 billion of cash and $16 billion in long-term
Voluntary Employees' Beneficiary Association (VEBA) balances. These
resources, along with proceeds from the potential sale of a majority
stake in GMAC, should provide critical liquidity through 2007.
In order to maintain the parent company's B1 rating, GM's
automotive operations, excluding any earnings or dividend contribution
from GMAC, will have to remain on track for generating interest
coverage exceeding 1.5 times, EBIT margin of over 2%,
and positive free cash flow by 2007. The following areas are the
principal drivers of GM's ability to implement longer term recovery:
Near term finalization of the proposed UAW agreement to reduce
health care costs, and laying the groundwork for productive negotiations
with the UAW regarding the 2007 contract negotiation;
Achieving component cost reductions including a supply agreement
with Delphi that materially reduces the current $2 billion cost
Avoiding operational disruptions stemming from Delphi's restructuring,
and minimizing obligations associated with its guarantee of certain Delphi
pension and health care benefits;
Rebuilding market share including establishing market acceptance
and reasonable pricing for the T900 series;
Completing the sale of a majority interest in GMAC;
Maintaining strong liquidity;
Resolving the SEC investigation in a manner that does not delay
release of or necessitate material adjustments to its financial statements.
Consistent progress in these areas could stabilize GM's rating outlook
and lay the ground work for a credit recovery. Conversely,
set backs could result in further rating downgrades.
GMAC's Ba1 long-term rating, which was placed under
review with direction uncertain on October 17, 2005, is not
affected by the downgrade in GM's ratings. GMAC's Not-Prime
short term rating, currently under review for possible upgrade,
is also not affected by the GM rating action.
Moody's believes GM to be aggressively pursuing its previously announced
intention to sell a controlling stake in GMAC. The outcome of a
successful transaction would likely lead to a separation of GMAC's
ratings from those of GM, assuming the strategic partner exhibits
sufficient financial and managerial strength and strategic alignment with
GMAC's auto and mortgage finance franchises.
Moody's believes GMAC's stand-alone credit profile
would currently warrant a low-Baa long-term rating,
based upon GMAC's franchise strength and reasonable credit metrics,
balanced by its sizeable direct and indirect exposure to GM. Moody's
has noted that should GMAC's new strategic partner exhibit both
an ability and willingness to support the enterprise, there could
ultimately be positive implications for GMAC's ratings beyond its
current stand-alone low-Baa credit profile.
Moody's notes that there is uncertainty regarding the outcome of
GM's plans for the sale of a controlling stake in GMAC. A
transaction this large and complex necessarily entails execution risk.
In maintaining the current Ba1 long-term rating, on review
with direction uncertain, Moody's is assuming that a transaction
is likely to be completed. If Moody's believes that a successful
outcome is less likely as events develop, Moody's could lower
GMAC's ratings in the interim. If GM is ultimately unable
to consummate its plans in such a way as to achieve ratings separation
for GMAC, Moody's would likely re-link GMAC's
long-term rating with the long-term rating of GM.
The number of notches of rating differential between the GMAC ratings
and the GM ratings would be evaluated at that time. Moody's
said that it has historically maintained a one-notch differential
between the firms' long-term ratings. This has been
based upon Moody's belief that GMAC's unsecured creditors
benefit from (1) to a limited degree, a lower likelihood of default
between the two firms, and (2) to a much greater degree, reduced
severity of loss upon default, relative to GM unsecured creditors.
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 world's
largest non-bank financial institutions.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S DOWNGRADES GM'S RATING TO B1 WITH NEGATIVE OUTLOOK; GMAC'S RATING AT Ba1 REMAINS UNDER REVIEW WITH DIRECTION UNCERTAIN
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service