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Rating Action:

Moody's assigns Ba2 corporate family rating to General Motors

11 Oct 2010

New York, October 11, 2010 -- Moody's Investors Service assigned a Ba2 Corporate Family Rating (CFR) and Probability of Default Rating (PDR) to General Motors Company (GM), and a Baa3 rating to the company's anticipated secured credit facility, the terms of which have not been publicly disclosed. Moody's also assigned GM a Speculative Grade Liquidity rating of SGL-1. The outlook is stable.

RATINGS RATIONALE

The Ba2 CFR reflects GM's strong position in developing markets, a competitive cost structure in North America, an improving domestic product portfolio, and a significantly stronger balance sheet and liquidity position as a result of the bankruptcy reorganization process. The rating also anticipates that the company's European restructuring efforts, combined with a modest recovery in market demand, will stem that segment's significant losses during 2011. GM also benefits from the overall restructuring of the US automotive sector. US OEMs have been able to move away from the dysfunctional practices that have burdened them for decades. This shift in the industry's operating structure has been the result of significant headcount reductions, the elimination of excess capacity, and the implementation of a new UAW contract. Consequently, the US auto industry is managing production levels and pricing in a much more sustainable manner.

We expect that GM will be able to generate increasing levels of free cash flow, gradually reduce its very sizable unfunded pension liability, and strengthen its credit metrics as a result of a healthier operating model and more favorable industry fundamentals.

Bruce Clark, senior vice president with Moody's said, "Over the long term, GM has the potential to become a more formidable player in the global automotive arena. The company has a sustainable business position in North America, Asia and Latin America. Success in fixing its troubled European operations would result in one of the more balanced global footprints in the industry. Trimming the company's large unfunded pension liability would give it the kind of balance sheet it needs to contend with the industry's ongoing cyclicality."

Notwithstanding these positives, the Ba2 rating also reflects a number of operating and financial challenges facing GM. In North America, the company is making progress in improving consumer perception of its vehicles, and it should begin to strengthen the pace of its product renewal cycle by 2012. Nevertheless, GM continues to lag its major domestic rival in both of these areas. In addition, despite the fact that GM's vehicle launches for 2010 and 2011 are heavily focused on cars and crossover vehicles, the company will remain heavily dependent on the success of trucks and SUVs. In Europe, GM is still generating sizable losses and will not complete this segment's restructuring and hoped-for turnaround for at least another year. Finally, although the bankruptcy process lowered its funded debt from approximately $50 billion to a current level of about $8 billion, GM still has $26 billion in unfunded pension liabilities. This liability results in the company having a significant debt burden on an adjusted basis. Consequently, despite improved first-half 2010 EBIT of $3.3 billion, GM's ratio of EBIT/interest is a modest 1.5x after Moody's standard adjustments.

We expect that this relatively modest coverage measure, and GM's other key credit metrics, will improve steadily as the company's earnings and cash generation continue to grow. The key drivers of this improvement will be stronger performance in North America, stemming of losses in Europe, and a significant reduction in the unfunded pension liability.

GM's SGL-1 liquidity rating is supported by the company's June 30th cash position of $31.5 billion, free cash generation that approximated $3.4 billion during the first half of 2010, and its anticipated bank credit facility. These liquidity sources provide ample capacity to fund the company's key cash requirements. These requirements include $5.5 billion in debt that is expected to mature during the twelve months from June 30th, and the need to fund intra-period working capital requirements that we estimate at $8 to $10 billion. Although discretionary pension contributions could be large, we expect that much of the funding will come from the company's free cash generation, and that the resulting liquidity position will remain strong. Importantly, GM's UAW contract, which expires in September 2011, contains a non-strike provision that requires arbitration in the event that an agreement cannot be reached. This provision provides important protection against the risk of a large strike-related cash burn occurring during 2011.

The stable rating outlook reflects Moody's expectation that the operating strengths that GM needs in order to improve earnings, grow cash flow, and reduce the pension liability are sustainable. In addition, the company's strong liquidity position should provide an ample cushion in the event of moderation in the pace of improvement in demand in major markets.

GM's Ba2 rating could come under pressure if the company does not remain largely on track for achieving key operational and financial initiatives through 2011. Operational initiatives include completing the restructuring of the European operations and approaching breakeven performance for these operations in 2011, executing successful new product launches of car and crossover vehicles in North America, and demonstrating further improvement in consumer perception of the domestic portfolio. Key financial initiatives include further deleveraging of the balance sheet while maintaining a strong liquidity profile. The rating also anticipates that GM will deliver metrics approximating the following for 2011: EBIT/interest approaching 3.5x; debt/EBITDA approximating 3.0x; retained cash flow/debt near 30%; and an EBITA margin of about 6% (5.2% for the LTM through June 2010).

Over time, to the extent that GM's product renewal programs and European restructuring initiatives give it the ability to consistently exceed these financial metrics while reducing its underfunded pension obligation, a higher rating could be considered.

To further discuss these rating actions Moody's will hold a teleconference on Tuesday, October 12 beginning at 11:00 AM EDT/16:00 BST/17:00 CET. To register and for additional information, please visit www.moodys.com/events.

The principal methodologies used in rating General Motors Company were Global Automobile Manufacture Industry published in December 2007, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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Moody's assigns Ba2 corporate family rating to General Motors
No Related Data.
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