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21 Feb 2006
Approximately $30 Billion of Debt Affected.
New York, February 21, 2006 -- Moody's Investors Service lowered the Corporate Family Rating and
senior unsecured rating of General Motors Corporation (GM) to B2/Negative
Outlook from B1/Review for Downgrade. GM's ratings were placed
under review for possible downgrade on January 26th. The downgrade
reflects increased uncertainty that the company will be able to achieve
all of the steps necessary to establish a competitive wage, benefit
and supplier cost structure outside of bankruptcy. These steps
include a successful resolution of the Delphi reorganization and the negotiation
of a considerably more competitive labor contract with the UAW during
2007. GM also faces the near-term challenge of completing
the sale of GMAC and resolving the current SEC investigations into various
accounting matters. Finally, the company's operating
profile continues to be pressured by declining US market share,
and the ongoing shift in consumer preference away from trucks and SUVs
as it introduces its T900 series of SUVs and light trucks. GM's
liquidity rating is affirmed at SGL-1, the highest category.
The ratings of General Motor's Acceptance Corporation (Ba1/review
with direction uncertain and Not-Prime/review for possible upgrade)
and of Residential Capital Corporation (Baa3 and Prime-3/review
direction uncertain) remain unchanged.
In order to establish a viable long-term business model and a competitive
cost structure, the UAW wage and benefit structure for both GM and
its largest supplier, Delphi, will need to be fundamentally
changed. Moody's believes that achieving the necessary level
of relief from the UAW will be a long and challenging process that will
face numerous hurdles during the next 18 months. Moody's
remains concerned that in the absence of material progress in reducing
its UAW-related cost burden through negotiations, GM could
resort to bankruptcy as an option to reduce this burden.
Moody's said that a successful resolution of the Delphi reorganization
remains a critical factor in GM's ability to achieve a viable business
model and sustain the B2 rating level. The key issues for GM are:
1) the extent to which Delphi can reach a contract with the UAW that restores
its competitiveness in North America; 2) the avoidance of a protracted
UAW strike at Delphi, which would interfere with GM's North
American production; 3) the degree to which GM can significantly
narrow the $2 billion cost disadvantage it incurs due to its Delphi-related
supply contracts; and 4) GM's ability to contain the financial
burden it will face as a result of its guarantee of Delphi/UAW benefits
and any additional financial contribution it may have to make in order
to facilitate an agreement between Delphi and the UAW.
Delphi extended the deadline for concluding negotiations with the UAW
and GM to March 30th, leaving a number of critical issues unresolved.
These include the magnitude of any reduction in the UAW wage and benefit
structure, potential cuts in employment levels, the possible
return of Delphi workers to GM's payroll, and the size of
any financial contribution by GM to facilitate a Delphi labor agreement.
Moreover, Delphi has stated that, absent an agreement among
all three parties, it will file a motion to reject its collective
bargaining agreement no later than March 31st. Due to the bankruptcy
court's obligation to consider objections to Delphi's filing
and, in turn, the company's response to these objections,
a ruling on the motion would be unlikely for several months. However,
should the court ultimately rule that the collective bargaining agreement
constitutes an undue burden that Delphi can reject, there is the
possibility that the UAW could respond with some form of job action.
Any prolonged strike or work slowdown by the UAW against Delphi would
be a significantly negative rating event for GM. It is also Moody's
view that a severe breakdown in the negotiations among the three parties,
accompanied by an extended UAW work action, might act as a catalyst
for GM to consider seeking relief by filing for bankruptcy.
Moody's expects that as part of GM's negotiations with the
UAW in advance of the September 2007 expiration of its current contract,
the company will likely need to seek material cost reductions in a number
of areas. These include a reduction in active employee health care
expenses, and significant changes to the "jobs bank"
program that requires GM to continue paying wages and benefits for workers
idled by plant shutdowns or production cutbacks. The degree of
relief needed by GM in these areas is considerable and may not be readily
obtained from the UAW.
In addition to the significant UAW wage and benefit concessions that GM
needs, it remains important for the company to complete the proposed
sale of GMAC. The company will likely need the proceeds from the
sale to help fund the potentially large cash requirements arising from
its various restructuring initiatives. These potential requirements
include expenditures necessary to facilitate the Delphi reorganization,
employee separation payments associated with any acceleration of GM's
announced 30,000 hourly employee head count reduction program,
and expenditures that might arise from the company's 2007 contract
negotiations with the UAW.
As GM pursues these initiatives it will also remain important for the
company to stem its continuing loss of US market share (which fell to
26% in January 2006) and to establish solid market acceptance and
pricing for the T900 series. Success in these areas will be critical
if the company's automotive operations are to remain on track for
generating the following metrics assumed in the current rating for 2007:
interest coverage exceeding 1.5 times, operating margin of
over 2.5%, and positive free cash flow. An
additional rating factor will be the company's ability to maintain
a cash and short-term VEBA position of approximating $18
billion, excluding any proceeds from the GMAC sale. Any inability
to remain on track for achieving these levels of financial performance
could result in pressure on the B2 rating.
GM's SGL-1 liquidity rating reflects the adequacy of the
company's $20 billion in year-end cash and short-term
VEBA to provide adequate coverage of its negative operating cash flow
and maturing debt obligations during the coming twelve months.
However, this rating is under pressure and could be lowered during
the near-term due to the funding requirements that may arise in
connection with GM's North American restructuring efforts,
the potential need to support the Delphi reorganization, and the
challenges associated with its ongoing negotiations with the UAW.
The rating might also be lowered in connection with any delay in the timely
filing of financial statements due to the ongoing SEC investigation.
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. Residential Capital
Corporation, a real estate finance company based in Minneapolis,
Minnesota, is a wholly owned subsidiary of General Motors Acceptance
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S LOWERS GM's RATINGS TO B2
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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