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04 Nov 2004
Approximately $150 Billion of Debt Affected.
New York, November 04, 2004 -- Moody's Investors Service lowered the long-term rating of
General Motors Corporation (GM) to Baa2 from Baa1, and concurrently
lowered the long-term rating of General Motors Acceptance Corporation
(GMAC) to Baa1 from A3. GMAC's Prime-2 short-term
rating is confirmed at the current level. The rating outlook for
both companies is stable.
The downgrade of the GM rating reflects Moody's expectation that
the company's key credit metrics will remain under pressure through
2005 due to various operational and competitive challenges. These
challenges include: 1) continued pricing competition in North America;
2) further progress by Japanese and Korean manufacturers in the domestic
truck and SUV market; 3) the need to lower its still-high
inventory level in the US and to reduce its dependence on the daily rental
market; 4) the near-term financial resources that will be
absorbed by the pending restructuring of its chronically weak European
operations; 5) a large retiree base that leaves the company vulnerable
to rising healthcare costs and the potential changes in economic,
actuarial or regulatory factors that drive its pension funding requirements;
and, 6) the much larger interest burden associated with the $13
billion in debt taken on to help fund the US pension plan. As a
result of these pressures, the rating agency anticipates that GM's
key near-term credit metrics will approximate the following:
EBITA margin of less than 1%; fixed charge coverage below
2 times; retained cash flow to net debt moderately in excess of 35%;
and, free cash flow to total debt could approximate 10%.
Moody's believes that in order to adequately support the Baa2 rating
GM's EBITA margin should approximate 4%; fixed charge
coverage should be in the 4.0 to 4.5 times range; retained
cash flow to net total debt should exceed 50%; and free cash
flow to total debt should be greater than 15%. Moody's
expects that GM's performance will be more consistent with these
levels by late 2006.
Moody's downgrade of GMAC reflects the significant business ties
between GM and GMAC that influence GMAC's origination volumes,
asset mix, and asset quality. In maintaining the one-notch
rating differential, Moody's rating recognizes GMAC's
intrinsic strengths, particularly its resilient earnings base and
strong liquidity. GMAC has appropriately evolved its funding profile
by lengthening debt maturities and by tapping new sources of funding,
taking advantage of the liquidity and high quality of its finance and
mortgage assets. GMAC continues to experience elevated levels of
net charge-offs but this is explained by worsened loss severity
-- default frequency has remained relatively stable, demonstrating
GMAC's commitment to sound underwriting. Favorable trends
in auto auction values led to modest improvement in the net charge-off
rate during the first half of 2004. Also an important consideration
in the rating differential is the expectation that GMAC's unsecured
creditors would have superior asset recovery experience relative to the
unsecured creditors of GM, if the companies were to come under severe
stress. Moody's intends to monitor GMAC's capital levels
and the relative characteristics of its pledged and unencumbered assets.
The stable rating outlook reflects Moody's confidence that GM has
the operational, financial and competitive resources necessary to
contend with these challenges and to begin generating credit metrics that
are more consistent with the Baa2 rating by late 2006. GM's
product cadence, which has been weak, should continue to accelerate
meaningfully through 2005, and should lay the groundwork for more
robust earnings in 2006. This product initiative will benefit from
the increasingly efficient manufacturing and assembly facilities that
GM maintains in North America. Longer-term, the company
will also be able to rely on growing earnings and cash flow from its competitive
Moody's also notes that over the intermediate-to-long-term,
GM's debt-service capacity is likely to benefit from three
important factors. First, the company's cash flow from
operations is likely to remain materially stronger than the level that
might be indicated by its reported earnings. This is because the
income statement will continue to recognize expense accruals for pension
and OPEB obligations that significantly exceed the current cash outflow
that is required. For the LTM through September 2004, these
expenses exceeded the related cash outflow by $3.8 billion.
Second, it is likely that GM's cash flow will continue to
benefit from a pension plan funding holiday due to the aggressive actions
by the company to achieve 100% funding of the plan. Finally,
GMAC should be able to maintain a dividend payment to GM of approximately
$1 billion per year. Moody's believes that this dividend
stream represents a relatively sustainable source of funds that enhances
the company's ongoing cash generation and debt service capacity.
The agency includes this dividend in its calculation of GM's free
cash generation and fixed charge coverage.
As GM attempts to solidify its position within the Baa2 category,
it is possible that the company may encounter unanticipated competitive,
operational, cyclical or market stress. An essential factor
supporting the stable outlook in the face of these possible challenges
is the company's strong liquidity. At September 2004 this
consisted of $21.0 billion in cash and securities,
$3.5 billion in short-term VEBA, and $12.5
billion in long-term VEBA. This compares with total adjusted
debt of $44 billion consisting of: $32.7 billion
of on-balance sheet debt, $3 billion in present value
of leases, and about $9 billion in unfunded pension liabilities
(mostly international). Moody's estimates that GM's
balance sheet debt has an average maturity of 19 years with only $4
billion maturing over the next five years.
Notwithstanding the stable outlook and our expectation that GM's
credit profile will improve, it is possible that certain factors
could result in pressure on the rating or outlook. These factors
would include: 1) severe and sustained intensification of the competitive
environment in either North America or Europe; 2) prospects that
GM's share position might suffer a prolonged erosion despite a more
aggressive new product cadence in both North America and Europe;
3) an inability to restore adequate returns in its European operations;
and, 4) the possibility that these factors or other pressures might
delay GM's ability to restore credit metrics consistent with the
General Motors Corporation, headguartered 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 RATINGS OF GM TO Baa2 AND GMAC TO Baa1. OUTLOOK IS STABLE. SHORT-TERM RATING OF GMAC CONFIRMED AT P-2.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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