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23 Oct 2001
MOODY'S LOWERS GM's LONG-TERM RATING TO A3 AND SHORT-TERM RATING TO P-2; CONFIRMS GMAC's A2 LONG-TERM AND P-1 SHORT-TERM RATINGS. OUTLOOK IS NEGATIVE
Approximately $100 Billion of Debt Securities Affected.
New York, October 23, 2001 -- Moody's Investors Service lowered the long-term rating (from A2
to A3) and short-term ratings (from Prime-1 to Prime-2)
of General Motors Corporation (GM), and confirmed the A2 long-term
and Prime-1 short-term ratings of General Motors Acceptance
Corporation. The rating outlook for both companies is negative.
These rating actions conclude a review for possible downgrade that was
initiated on August 17, 2001.
The downgrade of GM's rating reflects the erosion in the company's longer-term
competitive position in North America. This erosion stems from
the increasingly competitive environment in the high-margin U.S.
SUV, light truck and minivan markets, which accounts for the
majority of GM's earnings and cash flow. Moreover, the returns
generated by GM's domestic car operations and its international business
have been chronically poor. In contrast, many of its non-U.S.
competitors have a stronger and more diversified earnings stream:
they earn acceptable returns on cars sold in the U.S.;
they have a U.S. customer base that is generally younger
and more affluent than that of GM; they are entering the lucrative
U.S. truck, SUV and minivan markets; and,
they also enjoy solid profitability in their domestic markets.
This weakening in GM's competitive position is occurring as the U.S.
automobile market is entering a cyclical downturn that could be exacerbated
by the aftermath of the September 11th terrorist attacks. This
will create a very challenging near-term environment for the company,
and will result in weak cash generation and debt protection measures through
2002 and possibly into 2003. In response, we expect that
GM, similar to other U.S.-based automotive
manufacturers, may have to undertake a range of initiatives that
will reduce capacity and lower breakeven levels. The success of
such initiatives would be critical in GM's ability to generate an adequate
rebound in financial performance as the U.S automotive sector recovers.
Subsequent to past cyclical downturns, various restructuring and
product enhancement programs undertaken by GM, in combination with
rising demand, have enabled it to enjoy a robust recovery in earning,
cash generation and debt protection measures. GM's ability to successfully
lay the groundwork for an operational and financial recovery when the
U.S. market picks up will be critical to sustaining the
current rating level and to avoiding additional pressure on the A3 rating.
The negative outlook reflects the considerable uncertainty surrounding
the potential depth and duration of the current downturn, the scope
of any restructuring efforts that might ultimately be implemented by the
company, and the degree to which its financial performance will
improve when demand recovers. We expect that over the coming quarters,
the likely severity of the U.S. downturn, as well
as GM's ability to resize its operating structure, will become clearer.
During this period, Moody's will have an opportunity to more precisely
assess the timing and magnitude of the cash costs associated with the
full range of any initiatives undertaken by GM, the impact that
these efforts will have on the company's fixed cost position and break-even
levels, and the degree to which the company can lay an effective
foundation for strengthening its financial performance beyond 2002.
Important considerations in assessing this foundation will include:
1) GM's ability to lower its fixed cost structure, consolidate platforms,
and achieve additional efficiencies in both its supplier and dealer networks;
and 2) the market share, pricing and industry-shipment assumptions
that are the back drop for GM's future operating model.
Moody's believes that several factors will materially increase the challenges
that GM faces in any attempt to restructure its operating model,
contend with lower demand, and preserve a competitive position in
its key markets. These factors include: 1) the erosion in
financial flexibility attendant to the significant decline in the value
of GM's ownership in Hughes Electronics; 2) the long-term
challenge of re-invigorating the Cadillac and Saab brands in an
increasingly competitive luxury car segment; and 3) the need to establish
a more competitive brand image for its broad line of domestic automobiles.
The confirmation of GMAC's ratings is based on the company's sound operating
and financial position, the high quality and liquidity of its assets,
the importance of its auto finance operations to GM, and the relatively
stronger position of the finance company's creditors vis-a-vis
the parent's. The finance subsidiary's ratings are closely linked
with GM's given the interrelationship and business ties between the two
companies; and most rating movements for GM would produce a corresponding
movement in GMAC's ratings. Yet Moody's expects GMAC to remain
positioned to operate as a prudent finance company, with more stable
business metrics through economic cycles. Moody's believes that
these finance company characteristics present an incrementally better
credit proposition for debt investors than do the parent's, and
the one-notch rating differential reflects this conclusion.
Moody's believes that GMAC is a well-managed, technologically
sophisticated finance company. The company has operated with sound
levels of alternative liquidity to support both its debt-paying
ability and its ongoing business operations through market stresses,
and is well-positioned today. Short-term debt levels
have declined materially through 2001, with the finance company
making greater use of the long-term unsecured markets, as
well as the structured finance markets. One consequence is a vastly
increased level of bank line coverage of outstanding commercial paper.
Moody's also noted that weakness in the auto market, and the economy
generally, will continue to be adverse credit factors: borrower
performance is weakening, GM's new car volumes and pricing are facing
pressure, and the residual valuations on off-lease vehicles
are under stress. Yet Moody's believes that GMAC's underwriting,
pricing and credit reserve policies, as well as its solid capital
levels, provide appropriate protection against auto market cyclicality.
Moody's also indicated that GMAC's mortgage and ancillary businesses have
become solid contributors to GMAC's income stream, and add a level
of diversity to the business. GMAC has a substantial market presence
in both the residential and commercial mortgage sectors. Each of
these sectors could also prove cyclical, with residential mortgage
performance proving sensitive to prevailing interest rates.
GMAC's overall position is strongly influenced by its multifaceted relationship
with GM, and by mortgage market dynamics. GM's new car sales
volume directly influences GMAC's origination volumes, and car quality
and pricing influence lease residual valuations. The parent's marketing
policies influence the loan-versus-lease decision and borrower
quality, with deep incentives attracting higher-quality borrowers.
Also, GM may become an obligor to GMAC from time-to-time
in respect of intercompany dealings, although such transactions
are not material in size.
Nonetheless, Moody's believes that the position of GMAC's debt
holders is and will remain incrementally stronger than that of GM's creditors.
The rating agency concluded that GMAC's debt and equity constituents are
both motivated to ensure that the company maintains sufficiently prudent
financial metrics, operating standards, and asset quality
measures to continue its auto finance operations through any range of
stresses. GMAC's auto finance operations provide exceptional services
to GM by ensuring that financing is available to its dealers and targeted
retail customers, even through economic stresses, and by serving
as a customer relations link. In this regard, the highly
liquid nature of prime auto finance loans, including a deep securitization
market, provides flexibility for the finance company to provide
these services, even through a difficult environment, if it
continues to operate prudently. These strong economic motivations
for GM and GMAC drive Moody's to believe that the current protocols of
intercompany independence will be broadly maintained. Moody's long-term
debt ratings are opinions about the likelihood of default as well as recovery
or loss upon default. In light of its expectations as to GMAC's
ongoing operations, the rating agency indicated that the superior
recovery prospects for the finance company creditors, although unlikely
to be tested, warrants a single notch rating differential from the
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.
Jay A. Siegel
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233
J. Bruce Clark
Senior Vice President
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233
No Related Data.
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