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16 Mar 2005
Approximately $150 Billion of Debt Affected
New York, March 16, 2005 -- Moody's Investors Service placed under review for possible downgrade
the Baa2 long-term and Prime-2 short-term ratings
of General Motors Corporation and the Baa1 long-term rating of
General Motors Acceptance Corporation (GMAC). Moody's also
affirmed the Prime-2 short-term rating of GMAC.
Moody's said that the rating review is prompted by GM's announcement
that its automotive earnings and cash generation will be much lower than
previous guidance had suggested. GM's 2005 earnings outlook
(consolidated net income before extraordinary items) has fallen to the
range of $0.6 billion - $1.1 billion
from the earlier expectation of $2.2 billion - $2.8
billion. Moreover, GM is anticipating that its automotive
operations will consume nearly $2 billion in cash (prior to the
receipt of a $2 billion dividend from GMAC) as compared with prior
expectations for $2 billion in automotive cash generation.
This represents a significant $4 billion negative variance.
These earning and cash flow declines reflect the deteriorating performance
of GM's North American automotive operations (GMNA) which are now
likely to generate a loss in excess of $1 billion reflecting,
in part, an erosion in market share position that declined to 24.7%
for the two months to February 2005, from 27.6% for
calendar 2004 despite ongoing price incentives.
Moody's anticipates that GM may need to undertake material restructuring
initiatives in order to reduce the capacity and lower the breakeven level
of its North American operations. Along with these market and competitive
challenges, GM will also continue to face rising healthcare costs
associated with its large retired employee base. The company's
Other Post Employment Benefit (OPEB) liability is approximately $75
billion (before about $3.5 billion in short-term
Voluntary Employee Benefit Account (VEBA) balances and $16.5
billion in long-term VEBA balances), and annual health care
expenditures are about $5 billion.
Moody's said that its review will focus on GM's ability to
implement necessary cost cutting initiatives and new product programs,
and restore sufficiently robust earnings and cash generation to support
its debt and significant employee-related legacy costs.
In order to sustain the current rating, GM will need to demonstrate
that it has a compelling new product strategy and cost reduction program
that can be effectively implemented during 2005 and 2006. Moody's
believes that GM has demonstrated an ability to establish a competitive
variable cost structure in North America, and to successfully revive
the brand image of its products -- particularly its truck franchise
during 1999 through 2002, and its Cadillac brand. It is expected
that GMNA's new product cadence will considerably accelerate during
late 2005 and 2006. These factors could enable GM to lay a foundation
to begin improving its performance.
In order to appropriately support a Baa2 rating, the cost reduction
and new product initiatives undertaken by GM would need to generate credit
metrics that approximate the following by 2007: EBITA margin should
exceed 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%. For 2004, GM's metrics approximated
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
of about 10%.
As GM attempts to weather the operational and financial challenges of
2005, and to re-establish a more competitive business model
by 2007, the automotive operations should continue to benefit from
a sound liquidity position. At year end 2004, automotive
cash, securities and short-term VEBA balances approximated
$23 billion (prior to the $2 billion in payments expected
to be made during 2005 in connection with the Fiat settlement agreement).
The company also had $16.5 billion in long-term VEBA
balances. This liquidity position compares with $32 billion
in 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 about $3 billion maturing over the
next five years.
Moody's also placed the long-term ratings of GMAC under review
for possible downgrade, while affirming the company's Prime-2
short-term ratings. This action reflects the significant
business ties between GM and GMAC that influence GMAC's origination
volumes, asset mix, and asset quality. The review is
not a result of a change in Moody's views regarding GMAC's
intrinsic credit strengths, including 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. Moody's will continue to monitor GMAC's
liquidity under various downside scenarios.
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.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S REVIEWS Baa2 RATING OF GM AND Baa1 RATING OF GMAC FOR POSSIBLE DOWNGRADE; GMAC'S PRIME-2 RATING AFFIRMED.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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