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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
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
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
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
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
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
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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S LOWERS GM'S RATINGS
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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