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27 Oct 2008
Approximately $43 billion of debt affected
New York, October 27, 2008 -- Moody's Investors Service lowered the Corporate Family and Probability
of Default Rating of General Motors Corporation (GM) to Caa2 from Caa1,
and also lowered the company's Speculative Grade Liquidity rating
to SGL-4 from SGL-2. The rating outlook is negative.
Moody's placed the B3 senior unsecured rating of GMAC LLC (GMAC)
on review for possible downgrade. See separate press release of
this date for further information regarding the GMAC rating actions.
The downgrade of GM reflects the expectation that the pace and severity
of erosion in the US automotive sector will severely outpace the company's
ability to respond effectively, and that even with the benefit of
the U.S. Government's $25 billion guaranteed
loan program to assist auto companies in developing new fuel efficient
vehicles, GM's liquidity profile will continue to erode into
"The Caa2 long-term and SGL-4 liquidity ratings reflect
the risk that despite all of GM's business restructuring and liquidity
raising efforts to date, the magnitude of cash outflows due to ongoing
operating losses, debt repayments, and other uses will consume
the company's available cash during 2009", said Bruce
Clark, senior vice president with Moody's.
During August, GM announced an aggressive plan to preserve liquidity.
The plan was built on an expectation that US automotive shipments would
approximate 14 million units in 2008 and 2009, and that capital
markets would support its ability to complete asset sales and issue new
debt. Since the formulation of that plan there has been further
significant erosion in key underlying assumptions. Automotive unit
shipments during the last quarter of 2008 could be as low as a seasonally
adjusted annual rate (SAAR) of only 12.5 million; the SAAR
for 2009 is widely expected to approximate 13 million but could be weaker;
and, capital market conditions severely limit the likelihood that
GM will be able to sell assets or raise new capital.
At the end of June, GM's gross liquidity of $25 billion
included $21 billion in cash and $4.5 billion in
committed credit facilities. Its principal liquidity requirements
during the subsequent twelve-month period included: approximately
$11 to $14 billion in minimum cash needed to fund day-to-day
operating requirements; over $3 billion in debt maturities;
and, a sizable cash burn associated with operating losses,
capital expenditures, restructuring initiatives, and payments
relating to the Delphi reorganization. During the first half of
2008 these operating requirements resulted in a cash burn of approximately
$7 billion. During the second half of 2008 and through 2009,
the pace of operating cash consumption will remain high due to demand
levels that are now expected to be significantly below those that GM's
operating plan had anticipated. Evidence indicates that the Detroit-3
have significantly narrowed the productivity gap with transplants,
and are making steady progress in closing the product quality gap.
Clark explained that, "The big pay-off for the for
the industry was expected to come in 2010 when the domestic manufacturers
would likely have benefited from: a recovery in demand, new
product launches that include a healthy portion of cars and crossovers,
and significant cash savings associated with the UAW taking on responsibility
for retiree health care costs." In the case of GM,
these health care savings would come to about $3 billion per year.
"As a result, building liquidity positions that were adequate
to fund operations into 2010 has been of critical importance to the Detroit-3".
However, in the face weakening business conditions and rapidly depleting
liquidity, GM's overall credit quality is eroding more rapidly
than previously expected. The rating downgrades consider that absent
significant external financial and/or business assistance, GM could
face a cash shortfall by mid 2009. Consequently, the company's
rating profile is best reflected in the Caa2 probability of default rating.
To cover any potential shortfall, GM would need some form of externally
generated cash. Potential sources of liquidity might include government
loans that are sizable and that afford considerable flexibility regarding
the use of proceeds; a strategic combination that quickly reduces
costs and provides new capital; or, the sale or securitization
of an asset. However, the timing and magnitude of any of
these options remains uncertain, and their occurrence is not incorporated
in the current rating actions. To the extent that one or more does
occur in the future, the key rating consideration will be the degree
to which it provides a material near-term boost to liquidity.
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
Moody's lowers GM rating to Caa2; outlook is negative
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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