New York, 04-23-98 -- Moody's Investors Service raised the senior debt ratings of General Motors Corporation (GM) and General Motors Acceptance Corporation (GMAC) to A2 from A3 and GM's short term debt rating to Prime-1 from Prime-2. MOODY'S UPGRADES LONG TERM DEBT RATINGS OF GENERAL MOTORS CORPORATION, GENERAL MOTORS ACCEPTANCE CORPORATION, AND RELATED AFFILIATES TO A2; GENERAL MOTORS CORPORATION SHORT TERM RATINGS UPGRADED TO PRIME-1
The upgrades reflect the company's improved balance sheet liquidity and the structural improvements to the company's cost and product competitiveness in its North American Operations (NAO) despite the increasingly competitive environment and the potential for an end to the current period of unusually stable auto demand in the North American auto market. Also important to our rating action is Moody's expectation that GM will make partial prefundings of its other post retirement benefit obligations (OPEB) over the intermediate term and that its U.S. pension deficit, measured in accordance with GAAP, will be essentially eliminated in the near term. While Moody's notes that increasing its market share will continue to be a near term challenge, GM is no longer capital constrained in its product development program. Therefore, Moody's expects a strong pace of new product introductions with a greater emphasis on higher-margin vehicles over the intermediate term which should lead to a sustained stabilization in its U.S. market share.
Moody's upgrade of GMAC reflects the close link of its ratings with its parent. Although GMAC faces the risks of managing growth in non-auto finance businesses, its core auto finance business is closely linked with GM. Moody's expects GMAC will cautiously expand its product line and geographic presence in insurance and mortgage operations. GMAC's short term rating, which was upgraded to Prime-1 on May 5, 1995, remains unchanged. In addition, the Prime-2 short term and A3 long term bank loan ratings of Hughes Electronics Corporation and the Baa2 long term debt rating for PanAmSat International remain unchanged.
Ratings upgraded include:
General Motors Corporation – to A2 from A3 on its debentures, notes, senior notes, Swiss bonds, medium term notes, discount debentures, 1991 pass through certificates, guaranteed industrial revenue bonds, guaranteed pollution control bonds, guaranteed step-up eurobonds and variable rate demand revenue bonds; to (P)A2 from (P)A3 on its shelf registration for senior debt; to A2 from A3 on its Counterparty Rating; to A3 from Baa1 on its Junior Subordinated Deferred Interest Debentures; to "a3" from "baa1" on its preferred stock and Guaranteed Trust Originated Preferred Securities and (P) "a3" from (P) "baa1" on its shelf registration for preferred stock.
General Motors Corporation – to Prime-1 from Prime-2 for commercial paper; to VMIG-1 from VMIG-2 for industrial revenue bonds, pollution control bonds, and variable rate demand revenue bonds.
General Motors Acceptance Corporation – to A2 from A3 on its bonds, notes, debentures, eurobonds, medium term notes, and euro medium term notes; to (P) A2 from (P) A3 its shelf registration for senior unsecured debt; and to A2 from A3 its counterparty rating.
GM has improved its balance sheet strength. From 1995 through 1997, the combination of higher short-term liquid funds and lower debt resulted in a greatly improved net liquidity position. While higher stock buybacks will contribute to a reduction in GM's cash position in 1998, Moody's rating action recognizes that GM is committed to maintain a $13 billion target for its short term liquidity. Maintenance of balance sheet strength is particularly important to support the company's operations during the next market downturn.
Along with an improved balance sheet, GM continues to reduce costs, improve processes and increase efficiency in its North American Operations. Delphi, GM's parts and components operations which is now operated separately from NAO
, has written off or sold a number of underperforming segments and realized significant improvements in its competitive cost structure. While near term results from Delphi have been hurt by the impact of the slowdown in auto demand in Asia and from the slowdown in GM sales in the U.S., Moody's believes that the company will continue to be a positive contributor to GM's earnings. New product introductions have also contributed to higher returns at NAO. While still weighted towards the more competitive passenger car segment, GM has been aggressively updating NAO's product line-up in both cars and light trucks. While NAO is likely to face an adverse impact during a cyclical downturn in the U.S., Moody's believes that the company's overall financial flexibility would be sufficient to sustain debt protection measurements commensurate with its new rating category.
Improvement in NAO is also important given the recent decline in profitability at GM's International Operations (IO). In the early 1990s, GM's IO earnings were an important offset to the losses it recorded in NAO. While management is taking a number of steps to address profitability at IO, with both new products and cost reduction efforts, the increasingly competitive environment in Latin America and Europe, where IO produces most of its profits, will challenge IO to achieve the kind of returns it earned historically. A continued slowdown in Asia will also dampen near term earnings of GM's international operations.
GM has also reduced its employee benefit liabilities over the past few years. With additional pension contributions scheduled for 1998, GM's U.S. pension assets are likely to essentially equal its projected liabilities calculated according to the Statement of Financial Accounting Standards No. 87. More importantly, the company has improved its financial position sufficiently to begin partially prefunding its OPEB liabilities. GM's high level of OPEB liabilities continues to be a competitive disadvantage for the company. While this program will take a number of years to complete and could be delayed in a downturn, Moody's anticipates that GM will make progress in reducing this liability to a more manageable size. Along with the plan to prefund a portion of these liabilities, the company continues to actively search for ways to reduce retiree healthcare costs which are a significant component of this liability. The initiation of this long-term plan to partially prefund postretirement costs is an important part of Moody's improved outlook and decision to upgrade GM's rating at this time.
General Motors Corporation, headquartered in Detroit, Michigan, is the world's largest automobile producer. General Motors Acceptance Corporation, also headquartered in Detroit, Michigan, is wholly owned by General Motors Corporation. GMAC provides retail and consumer auto financing and wholesale dealer financing to both GM and other dealerships throughout the world. It is also engages in residential and commercial mortgages and insurance.
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