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Rating Action:

Moody's raises GM CFR to Baa3 and assigns Ba1 rating to new notes; outlook is stable

Global Credit Research - 23 Sep 2013

Approximately $15 billion of obligations affected

New York, September 23, 2013 -- Moody's Investors Service raised the Corporate Family Rating (CFR) of General Motors Company (GM) to Baa3 from Ba1, and assigned a Ba1 rating to the company's new offering of senior unsecured notes. Proceeds of the offering will be used to repay higher cost obligations. The upgrade of the CFR to an investment grade level reflects our expectation that GM's competitive position and credit metrics will continue to improve based on the strength of the company's new product introductions in a healthy US market, its solid position in the increasingly important Chinese auto market, and its focus on maintaining a robust liquidity profile. Additional rating actions include the following: the upgrade of GM's Probability of Default Rating (PDR) to Baa3-PD from Ba1-PD; affirmation of the Baa2 rating of the company's secured credit facility; and the withdrawal of the SGL-1 Speculative Grade Liquidity rating. The rating outlook is stable.

CFR and PDR ratings are typically maintained only at the speculative grade level in the United States. Consequently, the Baa3 CFR and Baa3-PD PDR will be withdrawn. GM's ongoing ratings will consist of the Baa2 rating for the secured credit facility and the Ba1 rating for the unsecured notes.

RATINGS RATIONALE

Bruce Clark, senior vice president with Moody's said, "GM has been on a steadily improving operational and financial trajectory since it emerged from bankruptcy. We think that the disciplines the company has embraced, combined with the strength of its US product portfolio and a healthy domestic market, will enable it to stay on that path."

GM is entering a robust phase of its new product introduction cycle in North America, and market response has been positive. Moreover, we expect that market fundamentals of the US auto sector will remain healthy, with industry shipments growing by 8.7% in 2013 and 2.9% in 2014, and minimal increases in incentive levels. This should enable GM to make progress in improving its North American margins, which remain below those of some peers.

GM's position in the Chinese auto market is an important source of strength for the company. Including its joint venture operations, GM is one of the leading auto producers in China, with a share position of approximately 14%. This market accounts for about 30% of GM's consolidated unit shipments and a significant portion of its earnings and cash flow. We expect that industry shipments of light vehicles in China will grow by about 10% in both 2013 and 2014. China affords GM with strong margins, good long-term growth prospects, and broad geographic diversification.

A key contributor to GM's attainment of an investment grade rating is Moody's expectation that the company will maintain a strong liquidity profile. Given the considerable cyclicality of the global automotive sector, ample liquidity is needed to cover the sizable cash burn that can occur during market down turns, and to ensure that the company can continue to fund investments in new model programs. At June 2013, GM's liquidity position approximated $31 billion, and consisted of $24 billion in cash and $7 billion in committed credit facilities ($11 billion in total facilities less $4 billion allocated to GM Financial). The company's principal liquidity requirements during the coming twelve months include our estimate of approximately $7 billion needed for intra-period working capital requirements, and $700 million in maturing debt. GM's $31 billion of liquidity provides considerable coverage of these requirements, and affords the company with ample flexibility to contend with market downturns and other operational stress.

A key risk facing GM is the possibility of aggressive pricing by Japanese competitors should they choose to emphasize market share over enhanced profitability following the significant decline in the Yen relative to the dollar. We currently see no evidence that such a pricing environment will be pursued. An additional risk remains the considerable cyclicality inherent in the auto sector, as evidenced by the severe downturn in the European market where GM is pursuing restructuring initiatives to restore the profitability of its operations.

We believe that GM's competitive positions in North America and China, combined with its strong liquidity position, provide it with adequate operating and financial flexibility to contend with these risks and to support its ratings.

GM is a holding company, with essentially all its operating assets and the vast majority of its liabilities held directly by its various subsidiaries. The notes being offered by GM are rated Ba1, one notch below the Baa3 CFR and two notches below the Baa2 secured credit facility. This notching differential results from the structural subordination of the unsecured notes to the considerable amount of liabilities at the operating subsidiaries. These liabilities include approximately $28 billion in under funded pension liabilities and $20 billion in trade claims. GM's secured credit facility is rated Baa2, one notch above the Baa3 CFR, due to its security package and to guarantees from GM's operating subsidiaries. In the event that this security is released or the subsidiary guarantees fall away, the facility will also rank junior to the claims at the operating company level and it is likely that the rating of the facility would be lowered to Ba1, the same level as the unsecured notes.

Further improvement in GM's ratings could be supported if the company is able to strengthen its profit margins in North America and to begin generating profits in Europe. The company would also need to maintain its solid position in China and a healthy liquidity profile. Metrics that could support additional positive rating action include: EBITA margin above 8%; debt/EBITDA remaining near 2x; and EBITA/interest approaching 6x.

Downward pressure on GM's ratings could result from a further weakening in European automotive demand, a decision to increase leverage as part of a more aggressive financial strategy, or a weak performance for the North American new product initiative. Metrics that might indicate pressure on the rating include: EBITA margin remaining near or below 5%; debt/EBITDA of approaching 3.0x; and EBITA/interest below 3.5x.

The principal methodology used in this rating was the Global Automobile Manufacturer Industry Methodology published in June 2011, The Rating Relationship Between Industrial Companies And Their Captive Finance Subsidiaries Methodology published in May 2012, and the Finance Company Global Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises GM CFR to Baa3 and assigns Ba1 rating to new notes; outlook is stable
No Related Data.

 

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