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25 Apr 2008
Moody's changes GM outlook to negative
Approximately $35 billion of debt affected
New York, April 25, 2008 -- Moody's Investors Service changed the rating outlook for General
Motors Corporation (GM) to negative from stable, but affirmed the
company's B3 corporate family rating and its SGL-1 speculative
grade liquidity rating. The change in outlook reflects Moody's
concerns that GMAC LLC's ability to provide retail and wholesale
funding in support of GM's automotive operations may be eroded by
the operating weakness at its subsidiary, ResCap LLC. GMAC's
long-term rating was lowered to B2 from B1 and remains under review
for further possible downgrade because of the risks that ResCap poses
for GMAC's capital position and liquidity profile (see separate
GMAC and ResCap press releases of April 23rd). Moody's believes
that in order for ResCap to have continued access to debt capital,
GMAC may be required to provide additional indications of support for
the unit and that it is likely to do so. This support, however,
could weaken GMAC's own credit profile and limit its ability to
access the secured and unsecured debt markets.
Moody's recognizes that GMAC retains a large cash position and sizable
committed credit facilities that can support a significant portion of
anticipated new receivable originations. In addition, should
GMAC's ability to fund originations be constrained by reduced access
to debt capital, third party lenders would likely remain willing
to fund higher-quality GM retail receivables. Nevertheless,
Moody's views the potential erosion in GMAC's credit profile
and its ability to fund retail and wholesale receivables as a material
risk factor for GM.
Bruce Clark, senior vice president with Moody's, said
that "GMAC has always filled a critical role in supporting GM's
retail sales, and anything that lessens its ability to provide that
support is a negative for GM. We think that one of the tradeoffs
for GMAC's potential support of ResCap is an erosion in its ability
to support GM's retail sales."
Additional factors contributing to the negative outlook are the considerable
cash requirements that GM will face during 2008 and 2009. By 2010,
GM has the potential to generate positive cash flow due, in part,
to the considerable savings that will begin to be realized from the UAW-managed
health care plan established as part of the 2007 labor contract.
Going into 2008, GM's gross liquidity consisted of approximately
$27.3 billion in cash and $7.3 billion in
committed credit facilities. These liquidity resources support
the company's SGL-1 speculative grade liquidity rating by
providing substantial coverage of all cash requirements likely to arise
during the coming twelve months. These requirements include:
ongoing minimum levels of cash required to fund intra-month working
capital requirements that can approximate 5%-6% of
revenues in the automotive OEM sector; scheduled debt repayments;
a large operating cash burn associated with declining industry volumes
in North America; and anticipated restructuring expenditures at both
GM and Delphi. GM could also be faced with additional cash expenditures
related to a resolution of the American Axle -UAW contract negotiations,
Delphi's bankruptcy emergence plans, or capital contributions
Clark noted that, "A critical element of GM's strategy
is to maintain enough liquidity to bridge the large cash consumption requirements
of 2008 and 2009, until significantly lower health care expenditures
start to occur in 2010. Our key credit concern is that while this
liquidity bridge is pretty robust through 2008, it could become
more tenuous as the company gets in into the latter half of 2009.
We'll continue to focus a lot of our attention on GM's liquidity
and its adequacy to get the company to 2010."
Although GM's approximately $34.6 billion in gross
liquidity will amply cover all of 2008's cash requirements,
the resulting level of liquidity available to cover 2009's requirements
will be significantly reduced. Moreover, Moody's remains
concerned that absent a material rebound in North American automotive
demand, GM's 2009 cash requirements have the potential to
strain the liquidity resources the agency expects to be available at that
time. As a result Moody's will closely monitor GM's
operating performance, the magnitude of cash needs, and the
prevailing market conditions through the coming nine months in order to
gauge the likely sufficiency of the company's liquidity resources
to fund all requirements during 2009. Over the course of this nine-month
period, indications that cash requirements are exceeding expectations
would likely lead to a lowering of the company's speculative grade
liquidity rating. An unabated erosion in the liquidity profile
would likely be a precursor to a downgrade of the company's long-term
ratings. Conversely, evidence that GM's intermediate
term cash requirements are lower than anticipated and that the resulting
liquidity position will adequately cover 2009's requirements would
contribute to a stabilization of the rating outlook.
General Motors Corporation, headquartered in Detroit, Michigan,
is the world's second-largest automotive manufacturer.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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