Strong Operating Performance Allows Fitch To Affirm Debt Of GM And GMAC

    NEW YORK & CHICAGO--Oct. 31, 2002--Fitch Ratings affirms the senior unsecured debt of General Motors Corporation (GM), the senior unsecured debt of General Motors Acceptance Corp. (GMAC), and both tranches of GM's convertible senior debentures at 'A-'. Fitch also affirms the corresponding commercial paper ratings at 'F2'. A complete list of affected ratings is detailed at the end of this release. The affirmation primarily reflects strong recent operating performance at General Motors North America (GMNA), driven by a strong truck product lineup, improving market shares and a favorable product mix, all bolstered by strong industry volumes. In combination with structural cost improvements, this has led to healthy cash generation and maintenance of strong liquidity, even after incremental pension contributions. Offsetting factors include continued negative price retention and unrelenting transplant competition, the company's significant pension obligations, its obligations with regard to Fiat, continued heavy losses in Europe, a deferral of the Hughes resolution, and limited progress in its car lineup. The Rating Outlook remains Negative.
    Market share gains at GMNA have been led by strong customer acceptance across a broad array of its truck products, as well as revitalized Cadillac brand. GM continues to benefit from a shift in its product mix toward the higher-margin trucks, which now represent approximately 56% of its vehicle unit sales, up from 50% in 2001. New product launches have generally been well executed and quality benchmarks continue to improve. However, price competition through high incentive levels continue to produce negative price retention, and GM has yet to re-establish its competitiveness in cars. Despite clear progress in its cost programs, GM will remain pressured to achieve its stated margin goals in an environment of increasing transplant capacity and potential weakening of industry volumes. Cost issues remain, particularly in the area of health care and those resulting from the company's contract renegotiation with the UAW (the existing contract matures in September 2003).
    GM's underfunded pension situation has materially worsened over the past year, likely capping three consecutive years of equity market declines. These obligations represent a significant claim on GM's cash flows for the foreseeable future and remain a primary factor in GM's rating. Fitch anticipates that over the next five years that GM will make contributions that will exceed $10 billion and that these contributions will begin in 2003 if not earlier (beyond the $2.2 billion already contributed). However, it is important to note that over the intermediate term any increase in interest rates or any rebound in market returns to historic trend lines would serve to moderate the current negative trendline. However, given factors such as GM's level of plan assets, its demographics, and its level of plan benefits paid, it is clear that GM's funding gap will not close solely by a reversal in market conditions. As such Fitch would expect GM to face substantial future cash contribution requirements over the long term, reducing cash available for reinvestment in productive applications. Finally the pension question must always be viewed in light of operating cash flow performance and existing cash balances. Over the long term GM will have to retain its operating strength in order to keep this issue manageable. GM's current performance trends would indicate that operating cash flow is expected to be more than sufficient to meet cash requirements mandated by ERISA. It is noted that any potential proceeds from a Hughes divestiture would supplement funds available for contribution to its pension funds. Overall, the magnitude of these obligations adds potential volatility to the ratings.
    Cash balances at GM (excluding Hughes) remain strong with gross cash (excluding VEBA) amounting to $15 billion. The gross cash balance including short-term VEBA should approach $18 billion. Offsetting this cash will be approximately $15 billion in debt resulting in a positive net liquidity position approaching $3 billion. Maturities are limited and very manageable over the intermediate term.
    Fitch views the Fiat put option as a likely call on GM's cash flow. The amount, timing and impact of any cash infusion and/or consolidation of Fiat Auto into GM remain uncertain. Fitch's expectation is that GM will seek to structure any transaction in a manner that falls short of a full assumption of Fiat and its obligations. Despite the flexibility contained in the terms of the put option, a full assumption of Fiat and its obligations would result in a review of the rating.
    Fitch views the initial rejection of the Echostar-Hughes transaction as a short-term setback for GM. Fitch still considers Hughes a valuable asset, but clearly concerns remain around the proceeds and the timing of any transaction. Should the deal fail to go through realization of the contracted $600 million break-up fee and the $2.7 billion agreement for Echostar to purchase PanAmsat would have a positive impact on Hughes. Fitch still expects GM to sell or otherwise divest of Hughes in a manner that would provide substantial proceeds to GM (i.e. not a spinoff).
    European operations continue to post heavy losses, and GM will be challenged to restore profitability over the next several years. Successful market share gains by European producers and heightened inroads by Japanese producers point to little relief from severely competitive conditions. GM Europe's Project Olympia cost reduction program has yet to offset top-line declines. Any stemming of losses over the short term would clearly benefit GM's consolidated cash generation capacity. Holden, the Australian auto division, is perhaps the best performing brand within GM, further exemplified by GMNA's plan to modify an existing Holden product into the future Pontiac GTO. Finally, GM of China appears to be doing well within the Chinese market.
    Over the years, GM has adopted an alliance strategy that has it involved with automotive companies such as Saab (which was eventually acquired), Isuzu, Subaru, Suzuki, Fiat, and now Daewoo. These ventures have met with mixed success, but have clearly drained substantial cash due to share acquisitions. This cash drain has been magnified (or in some cases could be magnified) by further additional investment to prop-up ailing partners. Fitch views the continued financial support of ailing alliance partners as a possible negative rating development and will evaluate any further support on a case by case basis. Given GM's public position on Isuzu and Daewoo, Fitch would view a bail-out of either of these entities as a potential rating issue.
    The ratings for GMAC continue to reflect the company's ownership by and strategic importance to GM. GMAC has generally maintained relatively good asset quality in its automotive finance portfolio, despite weaker economic and industry conditions. Fitch also recognizes improvements in capitalization and leverage at GMAC, which is commensurate with the current rating, although the company's risk profile has increased in recent years due to a rise in balance sheet intangibles including goodwill and securitization-based residual assets, which include mortgage servicing rights, interest-only securities, subordinated interests, and restricted cash accounts.
    Fitch's rating concerns for GMAC reflect more costly access to term unsecured debt markets and the volatile nature of mortgage banking. GMAC maintains adequate liquidity and could place more reliance on asset-backed funding should volatility in unsecured debt markets continue. Recognizing the potential for asset-backed structures to utilize the highest quality assets to maximize execution, Fitch will also monitor the quality of loans deposited into securitization trusts versus loans retained by the company to ensure unsecured bondholders are not adversely selected.

    Ratings Affirmed with Negative Rating Outlook:

    General Motors Corp.
    --Senior debt 'A-';
    --Commercial paper 'F2'.

    General Motors Acceptance Corp.
    --Senior debt 'A-';
    --Commercial paper 'F2'.

    General Motors Acceptance Corp. of Canada, Ltd.
    --Senior debt 'A-'.

    GMAC Australia (Finance) Ltd.
    --Senior debt 'A-'.

    General Motors Acceptance Corp. (U.K.) Plc.
    --Commercial paper 'F2'.

    GMAC International B.V.
    --Senior debt 'A-';
    --Short-term 'F2'.

    Opel Bank GmbH
    --Senior debt 'A-';
    --Short-term 'F2'.

    General Motors Acceptance Corp. Netherlands N.V.
    --Euro commercial paper 'F2'.

    GMAC Commercial Mortgage Bank (Ireland) Plc.
    --Euro commercial paper 'F2';
    --Short-term deposits 'F2'.

    General Motors Acceptance Corp. (N.Z.) Ltd.
    --Senior debt 'A-';
    --Commercial paper 'F2'.

    GMAC Commercial Mortgage Japan, K.K.
    --Senior debt 'A-';
    --Short-term 'F2'.