General Motors Corp., GMAC Ratings Lowered to 'BB' on Concerns About Business Prospects, Teleconf. at 2:00 PM Today
05 Mai 2005 - 10:06PM
PR Newswire (US)
General Motors Corp., GMAC Ratings Lowered to 'BB' on Concerns
About Business Prospects, Teleconf. at 2:00 PM Today NEW YORK, May
5 /PRNewswire/ -- 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 industry wide 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 debt holders. 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.
Complete ratings information is available to subscribers of
RatingsDirect, Standard & Poor's Web-based credit analysis
system, at http://www.ratingsdirect.com/ . All ratings affected by
this rating action can be found on Standard & Poor's public Web
site at http://www.standardandpoors.com/ ; under Credit Ratings in
the left navigation bar, select Find a Rating, then Credit Ratings
Search. Additional information on General Motors Corp. and General
Motors Acceptance Corp. as well as the automotive industry are
available on Standard & Poor's Web site,
http://www.standardandpoors.com/ , by clicking on the "Spotlight:
General Motors Corp. and Ford Motor Co." headline in the Hot Topics
Box at the bottom of the home page. Teleconference: Thursday May 5,
2:00 p.m. U.S. EDT Standard & Poor's Ratings Services will hold
a telephone conference call on Thursday, May 5, 2005 at 2:00 p.m.
Eastern Daylight Time to discuss today's rating actions on Ford and
General Motors. Please note that Standard & Poor's offers all
of its broadcast teleconference calls to all interested
participants on a complimentary basis. The call will begin promptly
at the time indicated. Please call at least 15 minutes before the
scheduled start of the call to complete the pre-call registration
process. Live Dial-in Numbers: 1-712-257-2017 1-517-319-9297
Conference ID#: 1868925 Passcode: SANDP1 Replay Number:
1-203-369-0708 Replay will expire on Thursday, May 12, 2005
RealAudio(TM): The call will also be available live in
"listen-only" mode at http://www.events.standardandpoors.com/ for
listeners with the Real Player(TM) software, sound card, and
speakers. The RealAudio(TM) playback is available until Thursday,
June 2, 2005. If you have any questions about the conference call,
please e-mail: . About Standard & Poor's Standard & Poor's,
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