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16 Mar 2006
Approximately $180 Billion of Debt Affected
New York, March 16, 2006 -- Moody's Investors Service placed the B2 long-term rating
of General Motors Corporation (GM) on review for possible downgrade and
lowered the company's Speculative Grade Liquidity to SGL-2
from SGL-1. Moody's also changed the review status
of General Motors Acceptance Corporation's (GMAC) Ba1 long-term
rating to "review for possible downgrade" from "review
with direction uncertain" and confirmed GMAC's Not Prime short-term
rating. In addition, Moody's changed the review status
of ResCap's senior unsecured Baa3 and short-term Prime-3
ratings to "review for possible downgrade" from "review
with direction uncertain." These rating actions follow GM's
announcement that it will delay filing its annual report on Form 10-K
with the SEC due to an accounting issue regarding the classification of
cash flows at ResCap, the residential mortgage subsidiary of GMAC.
The GM rating actions reflect Moody's concern that the delayed filing,
in combination with the ensuing time necessary to resolve the outstanding
accounting matters, poses the risk of a potential event of default
under the terms of the indentures covering GM's $32 billion
in bonds as well as its $5.6 billion undrawn credit facility.
Additionally, further delay in meeting the company's filing
requirements could impede prospects for GM's proposed sale of a
majority interest in GMAC.
The GMAC and ResCap rating actions reflect the rating agency's view
that the delay in filing financial statements, and the factors contributing
to the delay, highlight substantial control issues in both firms.
Though neither GMAC nor ResCap are required to file their financial statements
with the SEC until March 31, Moody's is also concerned that
there is a potential for further filing delays beyond the March 31 deadline
and any short-term filing extensions, which could present
a challenge to the two company's efforts to raise debt in the capital
markets. Failure to file in a timely manner could also constitute
a default under bond indentures and bank agreements of each company,
though these agreements customarily include cure periods that provide
for additional time to resolve such issues.
GM continues to be engaged in efforts to sell a controlling stake in GMAC
but Moody's believes that negative developments such as the filing
delay could slow the progress of the sale process. In addition,
Moody's believes that the characteristics of potential buyers of
the GMAC stake and the transaction's structure are increasingly
less likely to contribute to a rating outcome that is higher than GMAC's
or ResCap's current ratings. Given this view, together
with the issues highlighted above, even if GMAC and ResCap successfully
file their financial statements within their deadlines, Moody's
does not expect to change the current rating review status at that time.
GM's failure to timely file its financial statements poses a potentially
serious risk to its liquidity. Indentures governing the company's
$32 billion in rated debt require the submission of audited financial
statements to the indenture trustee within 15 days of the deadline for
filing with the SEC. Should GM be unable to meet this requirement,
it could receive a notice of default. Under the indentures'
cure period provisions, GM would then have 90 days to remedy the
default or receive waivers, otherwise it could face an acceleration
of these obligations (possibly as early as the end of June). These
delayed-filing-related risks were identified and more fully
discussed in Moody's November 2005 Financial Reporting Assessment
entitled "Potential Credit Implications to General Motors of Recently
Announced SEC Investigations and Accounting Restatements".
Moody's also believes that a delay in the timely filing of financial
statements could also hamper the planned sale of a majority interest in
GMAC. The sale proceeds are needed to supplement GM's $20
billion cash and VEBA balances at a time when the company faces significant
cash requirements to fund operating losses and a number of large strategic
undertakings. These undertakings include: providing financial
assistance in connection with the Delphi reorganization; accelerating
GM's announced restructuring and employment reduction initiatives;
and, payments that might be necessary to achieve adequate work rule
and benefit concessions from the UAW as part of the 2007 contract renegotiation.
Moody's review will focus on the company's ability to file
its financial statements in the near term in order to avert potential
disruption to its financial flexibility. The review will also focus
on the quality of GM's 2005 earnings including an assessment of
the impact of restatements and disclosures relating to unusual charges
as well as the extent and nature, if any, of material weaknesses
and control deficiencies.
In addition to the above areas of review, GM's ability to
sustain its B2 rating is dependent on the company's progress in
several specific areas including: completing the sale of a majority
interest in GMAC; avoiding a UAW strike at Delphi Corporation;
assisting in a successful reorganization of Delphi; establishing
solid market acceptance of its T900 trucks and SUVs; and, establishing
a more competitive benefit and work rule framework following the renegotiation
of its UAW contract in September 2007.
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
Mark L. Wasden
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
MOODY'S REVIEWS RATINGS OF GM, GMAC AND RESCAP FOR POSSIBLE DOWNGRADE
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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