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12 Oct 2004
Approximately $200 Billion of Debt Affected.
New York, October 12, 2004 -- Moody's Investor's Service is reviewing the Baa1 long-term
rating of General Motors Corporation (GM) and the A3 long-term
rating of General Motors Acceptance Corporation (GMAC) for possible downgrade.
The Prime-2 short-term ratings of GM and GMAC are not under
review and are affirmed at the current level.
The review of GM's rating reflects Moody's view that the company's
credit metrics are weak for the current rating level and are likely to
display only marginal overall improvement during 2005. Consequently,
the review is focusing on the degree to which GM's longer-term
strategic and operating plan can assure a significant improvement in credit
metrics during 2006 and beyond. Moody's expects that the
company will face considerable challenges as it attempts to restore the
levels of earnings, cash generation, and debt service capacity
that it enjoyed during the 2000 through 2003 period. At that time,
GM benefited from a very robust and competitive new product program.
In contrast, the new product cadence covering the 2003 through 2004
period is likely to be relatively light. This has contributed to
a weakening in the company's competitive position and earnings capacity,
and will limit the degree of near-term improvement. The
company's prospects through 2005 are further burdened by the high
inventory levels of its North American operations, and by the need
to stem the continued losses within Europe. A significant longer-term
challenge is also posed by the company's large retiree base and
the resulting high level of health care costs. At year end 2003
GM's unfunded OPEB liability was $57 billion (exculding the
$4 billion Medicare subsidy), and annual health care costs
approximated $5 billion. Moody's believes that this
burden will represent an increasingly material competitive disadvantage
for GM as health care costs continue to rise.
As GM contends with these company-specific risks, it will
continue to face the industry-wide challenges of intense pricing
competition, ongoing cyclicality, and the possibility that
higher oil prices or shifts in consumer sentiment could erode demand for
higher-margin trucks and SUVs.
In its review, Moody's will weigh these risk factors against
GM strengths. The company's liquidity is sound with $25
billion in cash, securities and short-term VEBA compared
with a total adjusted debt burden of $44 billion. This total
debt figure is composed of: $32 billion in on-balance
sheet debt, $3 billion in present value of operating leases,
and $9 billion in unfunded pension liabilities. Moody's
estimates that the average maturity of the balance sheet debt is 19 years,
with only about $4 billion maturing over the next five years.
Operationally, GM has demonstrated an ability to develop and maintain
a competitive product portfolio in its Cadillac and its truck and SUV
franchises. The brand building expertise that support the strength
of these businesses will have to be effectively employed during the 2006
and beyond time frame as the company's product cadence is accelerated.
Moody's also acknowledges the success that GM has had in building
its position in the large, profitable, and growing Chinese
market. Although near-term growth in this area may slow,
it will represent an important long-term growth opportunity.
GM is well positioned to take part in this growth.
GM has demonstrated exceptional cash generating capacity during the past
three years. For the 2002 through 2004 period, the cash flow
from automotive operations (after capital expenditures, working
capital and dividends), in combination with a sustainable dividend
received from GMAC, will have generated close to $21 billion
in free cash flow available for pension and VEBA contributions,
and other discretionary actions. However, the robustness
of the company's cash generation is declining due to rising competitive
pressures. In addition, successful working capital and other
asset/liability management practices have been important sources of cash
generation in the past. These sources may not be as sustainable
in the future.
Moody's key focus in its review of GM will be on balancing the considerable
near-term weakness in the company's credit metrics against
the possibility that longer-term performance in 2006 and beyond
might be more reflective of the Baa1 rating. In order to achieve
this performance, GM will have to demonstrate that it is capable
of adequately improving the earnings of its North American operations,
stemming losses in Europe, and offsetting rising health care costs
in the face of an increasingly competitive market. As outlined
in Moody's Rating Methodology for the Global Automotive Industry,
some of the credit metrics which could be reasonably associated with a
well-positioned Baa-rated auto manufacturer (assuming adequate
ongoing product and strategic competitiveness) might include: EBITA
margin exceeding 4%; fixed charge coverage approximating 4.5
times; retained cash flow to net total debt of more than 50%;
and free cash flow to total debt greater than 15%. For 2004,
Moody's expects that GM performance will approximate: EBITA
margin no greater than 1%; fixed charge coverage of less than
2 times; retained cash flow to net debt should exceed 35%;
and, free cash flow to total debt could approximate 10%.
Should Moody's determine that GM's rating should be lowered,
it is unlikely than any adjustment would be more that one notch.
The review of GMAC's long-term rating recognizes the significant
interrelationship and business ties between GMAC and its parent.
These links affect the volume and mix of GMAC's origination activity
and the quality of its portfolio. GMAC continues to exhibit favorable
inherent characteristics, including strong liquidity and well-managed
asset quality. The firm's asset quality had weakened during
the 2001 to 2003 period, but this was a result of depressed used
car values as opposed to loosened underwriting standards. Assest
quality has since improved. Moody's therefore expects that
GMAC will continue to generate assets that could be readily financed in
the securitization market. Additionally, Moody's will
monitor the relative strength of its on-balance sheet portfolio
compared to its securitized portfolio. Moody's expects to
maintain the one notch rating differential between the long-term
ratings of GMAC and GM, reflecting the relative strengths of GMAC's
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
MOODY'S REVIEWS LONG-TERM RATINGS OF GENERAL MOTORS (SR AT Baa1) AND GENERAL MOTORS ACCEPTANCE CORP. (SR AT A3) FOR POSSIBLE DOWNGRADE.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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