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Rating Action:

MOODY'S LOWERS GM'S RATINGS

24 Aug 2005

Approximately $170 Billion of Debt Affected

New York, August 24, 2005 -- Moody's Investors Service lowered the ratings of General Motors Corporation (GM) senior unsecured debt to Ba2 from Baa3, and its short-term rating to Not Prime from Prime-3, and assigned a Ba2 Corporate Family Rating and an SGL-1 speculative grade liquidity rating. Moody's also lowered the ratings of General Motors Acceptance Corporation (GMAC) senior unsecured debt to Ba1 from Baa2, and short-term rating to Not-Prime from Prime-2. The rating outlook for both companies is negative.

The downgrades reflect continuing operating losses in GM's North American automotive operations as well as challenges in restructuring the company to achieve a viable long-term competitive position as a leading global automaker. In Moody's view, a successful restructuring must address the company's high fixed cost burden associated with hourly employee healthcare costs and excess capacity, repositioning GM's product offerings in order to curtail the need for large sales incentives, and additional actions needed to address the competitive weakness of its US supply base, including Delphi Corporation.

Ratings lowered include:

General Motors Corporation and supported entities: senior unsecured debt to Ba2 form Baa3; shelf registration of senior unsecured debt to (P)Ba2 from (P)Baa3, subordinated debt to (P)Ba3 from (P)Ba1, junior subordinated debt to (P)Ba3 from (P)Ba1, and preferred to (P)B1 from (P)Ba2; VMIG-3 rating to S.G.; and, short-term rating to Not-Prime from Prime-3.

General Motors Acceptance Corporation and supported entities: senior unsecured debt to Ba1 from Baa2; senior unsecured shelf to (P)Ba1 from (P)Baa2; and short-term rating to Not-Prime from Prime-3

Ratings assigned:

General Motors Corporation: corporate family rating, Ba2; and speculative grade liquidity rating, SGL-1.

Moody's estimates that GM's total automotive operating cash flow for 2005 will be in the area of a negative $3 billon. A portion of this negative cash flow relates to a reduction in trade payables in connection with the company's decision to reduce excess inventories as well as unabsorbed fixed charges as production was ramped down. This type of reduction should not recur during 2006.

GM is attempting to address the challenges it is facing through the implementation of a North American recovery plan. This plan includes reducing employment by more than 25,000 during the 2005 to 2008 period, and reinvigoration of product offerings requiring increased reinvestment. The most critical element of the recovery plan is GM's effort to negotiate significant reductions in healthcare costs with the United Auto Workers union (UAW) as GM's large retiree base places the company at a significant competitive cost disadvantage relative to other auto manufacturers.

GM is also contending with the financial and operating difficulties of key components suppliers, including Delphi Corporation. Risks to GM include cash contributions and other economic considerations necessary to enable Delphi to achieve a financial restructuring. Also GM might face operational disruption as a result of a Delphi bankruptcy filing as well as the prospect of having to provide pension and healthcare benefits to certain Delphi employees and retirees under the terms of the agreement reached at the time of the Delphi spin-off.

The SGL-1 speculative grade liquidity rating reflects Moody's expectation that GM's $20 billion cash and short-term VEBA position (June 30, 2005) will provide adequate coverage of cash requirements during the next twelve months. These include the possibility of the negative cash flow the company will likely experience during the remainder of 2005 and early 2006, and approximately $1 billion in maturities of long-term and short-term debt.

The negative outlook reflects the potential for the rating to be further lowered should GM fail to successfully implement its North American recovery plan -- including achieving healthcare cost relief with the UAW and reducing headcount. GM's liquidity provides an important cushion as the company attempts to restructure its operations. Any material erosion in GM's liquidity position would make its rating more vulnerable to the pressures that continue to confront its automotive operations.

The Ba2 rating anticipates that GM will: 1) maintain US market share of approximately 25%; 2) achieve strong market acceptance and sustain healthy price realization for new products including the T900 light truck and SUV series; 3) earn automotive pretax profit in excess of $500 million for 2006; 4) generate at least breakeven automotive operating cash flow before pension, VEBA, GMAC dividends; and 5) maintain gross liquidity (cash and short-term VEBA balances) at or above $20 billion. GMAC, through its continued support for the wholesale and retail financing requirements of GM and through the dividend payment to its parent ($1.5 billion during 2004), is also an important support element in Moody's assessment of GM. The Ba2 rating for GM anticipates that during 2006 GM's metrics, including GMAC's dividend and using Moody's standard adjustments, will approximate the following: EBITA margin exceeding 2%; interest coverage of 1.5 times, and free cash flow to debt in the mid-single digits range.

Factors that could stabilize GM's rating outlook include a return to sustained profitability and free cash flow generation, particularly in its North American operations. This requires successful implementation of its North American recovery plan, including achieving meaningful healthcare cost relief from the UAW. Moreover, the company will need to stem any further erosion of its competitive market position through product enhancements that sustain market share without the need for significant sales incentives.

Factors that could contribute to pressure on the Ba2 rating include: 1) US market share falling below 25%; 2) reduced levels of dividends from GMAC; 3) failing to maintain balance sheet liquidity of about $20 billion; and 4) material negative variance from the credit metrics cited above.

Moody's is maintaining a one rating notch differential between the GMAC and GM long-term ratings. In Moody's view, loss severity for GMAC's creditors would be meaningfully lower than for GM's creditors were the two companies to default on their debt obligations. We believe any potential for increasing the notching distinction relates to widening the difference in probability of default between the two firms. Changing ownership and governance structures could lead to greater notching, though given the significant GM-related concentrations, the potential is probably limited to one additional notch.

Moody's downgrade of GMAC's ratings reflects issues at the GM level that could affect GMAC's condition and performance. For example, Moody's believes that the potential for sustained demand weakness and high sales incentives for GM's autos could ultimately lead to softer residual values, thereby negatively impacting GMAC's credit loss and lease residual realization statistics. Also, though not presently a concern, the quality of dealer finance receivables could be compromised should sales deteriorate to lower levels, pressuring the financial condition of the dealer base. However, in light of the mutual benefits GM and GMAC derive from their association, measured in repeat sales and origination volumes and profit distributions, we believe GM is committed to preserving GMAC's strong franchise value. We therefore do not expect the company to vary from its historical commitment to quality underwriting and risk management practices.

A key intermediate term rating issue for GMAC is its liquidity management. GMAC has demonstrated a forward-thinking approach to managing funding and liquidity challenges, but this task has become more difficult as access to the unsecured markets has declined, leaving fewer financing alternatives for GMAC's less-liquid assets. Funding constraints may define the scale and scope of GMAC's operations should alternative funding sources not become more readily available. Given these issues, maintaining flexibility via an adequate capital cushion is of high importance in Moody's view; deviation from the current trend of moderating leverage would reflect negatively on GMAC's intrinsic credit profile.

Results in GMAC's core auto finance operations are under pressure due to a shrinking asset base and higher borrowing costs. But strong cash flow from portfolio runoff and sizeable cash balances should mitigate near term liquidity pressures, affording the company some time to address funding challenges. GMAC's mortgage and insurance units have performed admirably, though dwindling refinance volumes associated with stabilizing mortgage rates could result in a reversal of earnings momentum. Cost management will be a key to sustaining profitability metrics as the company deals with the consequences of moderating earning asset levels and higher cost of funds.

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 LOWERS GM'S RATINGS
No Related Data.
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