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Rating Action:

Moody's changes GM outlook to negative

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 to GMAC.

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.

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

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

No Related Data.
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