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05-05-2005, 12:43 PM
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
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.