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General Motors
NEW YORK (Standard & Poor's) May 5, 2005--Standard & Poor's Ratings Services
said today that it lowered its long- and short-term corporate credit ratings on General Motors Corp. (GM), General Motors Acceptance Corp. (GMAC), and all related entities to 'BB/B-1' from 'BBB-/A-3'. The rating outlook is negative. Consolidated debt outstanding totaled $291.8 billion at March 31, 2005. Standard & Poor's will hold a telephone conference call today at 2:00 p.m. Eastern Daylight Time and on Friday, May 6, at 9:00 a.m. Eastern Daylight Time to discuss today's rating actions (see the call-in details below). Scott Sprinzen, of Standard & Poor's auto ratings team, will be the speaker. At the conclusion of his remarks, he will be available to answer questions. The downgrade to non-investment-grade reflects our conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages. Still, GM should not have any difficulty accommodating near-term cash requirements. The effort by Kirk Kerkorian's Tracinda Corp. to increase its ownership stake in GM represents an additional uncertainty; however, this is not a factor at all in the current rating action. Of greatest immediate concern is that GM's sport utility vehicles (SUVs) will no longer be as profitable as they have been in recent years. "GM's financial performance has been heavily dependent on the profit contribution of its SUVs," said Standard & Poor's credit analyst Scott Sprinzen. "Recently, though, sales of its midsize and large SUVs have plummeted, and industrywide demand has evidently stalled, partly because of high gas prices. Also, competition has intensified due to a proliferation of new SUVs," he continued. GM has suffered from the aging of its SUV product line, which will be replaced by a family of new products during 2006 and 2007--when Ford Motor Co. will be doing the same. Moreover, competition could intensify in full-size pickups--GM's only other major source of automotive earnings. Although GM will be renewing its pickups in one and a half years to two years, Toyota Motor Corp. will introduce a new full-size pickup during this period. Even with extensive efforts to renew its products, GM continues to lose market share in North America, despite an aggressive pricing strategy--and we believe the company's reliance on discounts has itself been detrimental to its brand equity. In addition, it is questionable whether GM's relative competitive standing has improved as a result of extensive cost-cutting in its North American operations. The company has downsized operations through curtailing excess production capacity, but the boost to its efficiency has been undermined by market-share losses. The company has significantly reduced the size of its workforce, but total personnel costs have risen, due in part to the soaring cost of its relatively generous health insurance benefits. Altogether, GM's overseas automotive operations are not mitigating the difficulties the company faces in North America. GM has been unprofitable in Europe since 1999, and its losses there this year will likely be substantial, even before taking account of costs related to yet another round of restructuring actions. GM had until recently been highly profitable in China, but it is now suffering from weak demand in that region. This decline could prove temporary, but it underscores the volatility of that market, where virtually all the world's automakers are investing heavily to expand their presence. GM continues to derive significant earnings from GMAC, which has benefited in recent years from low credit losses and improving lease residual realizations. However, as interest rates have risen, GMAC's sales finance earnings have recently weakened markedly from the exceptional levels of 2003 and 2004. GM's overall earnings have recently deteriorated precipitously. GM incurred an alarming $1.1 billion net loss in the first quarter of 2005. We believe profitability could remain poor for the rest of this year, and prospects for a return to adequate profitability in the next few years are becoming increasingly uncertain. Although GM has substantial cash reserves, its ability to withstand persistent poor financial performance is not unlimited. We now expect consolidated parent-level cash outflow to be in excess of $5 billion this year. Unless the automotive operations' cash generating ability improves, GM's burdensome postretirement benefit obligations could become even more onerous. Even with $9 billion of VEBA contributions made during 2004, favorable investment portfolio returns, and the estimated $4 billion benefit of the new Medicare prescription drug program, its unfunded retiree medical liability increased to $61 billion at year-end 2004 from the already massive $57 billion at year-end 2003. GM's financial performance has proven to be volatile and unpredictable. Accelerating deterioration in the North American market mix, intensifying price competition, poor acceptance of GM's future new products, labor strife, and/or a weakening of the general economy could ultimately jeopardize the rating. If GM were able to roll back its health insurance benefits, this could reduce a significant competitive disadvantage; however, we are skeptical about whether the company's principal labor union, the United Autoworkers, will cooperate with this. Otherwise, management has alluded to new cost-cutting initiatives, but the nature, extent, and ultimate efficacy of such measures are unclear. We assume that, even without an investment-grade rating, GMAC will have sufficient funding flexibility to carry on its vital role of providing sales financing support to GM. Although GMAC will likely be more reliant on ABS funding, its future borrowing capacity in the unsecured term debt market is unclear. If GMAC remains heavily dependent on ABS funding, this would be detrimental to the asset protection for unsecured debtholders. Although we have decided not to notch down GMAC's senior unsecured issue ratings from its corporate credit rating at this juncture, we could still do so in the future. Given the advantages to a finance company of having a higher credit rating, GM could restructure the relationship between itself and GMAC to allow GMAC to receive a higher rating. Elements of such a plan might include the sale of a significant ownership stake in GMAC to a third party, installation of independent board members, and the inclusion of relatively comprehensive and restrictive financial covenants in borrowing agreements. However, the nature of the ongoing business ties between GM and GMAC would still need to be considered and would likely preclude more than a one-notch rating differential between the two. In the absence of sufficient steps to restructure the relationship between them, GMAC's rating will remain equalized with GM's. We are not reassessing our criteria for viewing such parent/subsidiary situations, nor do we see any grounds for making a special exception for GM and GMAC. |
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