Fitch Downgrades Debt of General Motors and GMAC to 'BBB+'
CHICAGO--June 19, 2003--Fitch has downgraded the senior unsecured debt of General Motors Corporation (GM) and its financial services subsidiary, General Motors Acceptance Corp. (GMAC) and related entities to 'BBB+' from 'A-'. Fitch affirms the corresponding commercial paper ratings at 'F2'. The Rating Outlook remains Negative. A list of all affected ratings is detailed at the end of this release.The downgrade is the result of an increasingly more negative incentives environment, weaker than expected share performance in the key US light vehicles market (down to 27.3% calendar year to date), ongoing concerns about healthcare / pension costs, and longer term concerns about GM's competitive position especially in the key US market and especially in light of the upcoming United Auto Workers (UAW) negotiations. Positives include GM's strong liquidity position, the extended nature of its debt maturity schedule, strong product introductions such as the Hummer H2, better product mix in North America, stronger pension asset performance, and the strong performance at GMAC and in the Asia Pacific region.
One of Fitch's foremost concerns is that the current pricing environment may have permanently lowered the profitability profile of those companies that have most strongly participated. In the case of GM, Fitch is concerned that GM may be unable to restore the margins that have been lost over the last two years. This is especially true in the car portfolio which has been a laggard for several years. Although good new products can be helpful in increasing profitability, it is not clear to what degree, as the industry has shortened its product cycle substantially over the last five years. Innovative and well positioned products like the H2 and the XLR have demonstrated that it is possible to hold relatively stable in this very negative pricing environment. However, these are relatively niche products that do not represent substantial volumes. The counter to that are the Cadillac ESV and CTS which already have low rate financing in place. Finally, although we recognize the benefits of a consistent marketing message, we feel that at this point GM is leaving money on the table in that its consistent message is hurting the overall profitability of the company. GM has lost both pricing and share in the US (down from 28.1% CYTD in 2002 to 27.3% in 2003). Although Fitch recognizes that there are other factors at work (such as capacity utilization concerns), much of this is happening despite the fact that GM has what we consider a generally competitive overall portfolio of vehicles (especially trucks).
Other concerns, especially in light of weaker than expected US market performance, include healthcare and pension costs which have been escalating over the last several years and represent a substantial drag on GM's earnings and cashflows. Although the healthcare issue is truly a national issue, that does not mitigate the fact that GM is the largest corporate provider of healthcare in the U.S., and is as such extremely exposed to the negative cost trends in this area. This exposure is not limited to merely active employees but is also more importantly reflected in GM's OPEB exposure. Although Fitch recognizes that the OPEB obligation does not have the same legal funding requirements as the pension obligation, it is none-the-less an important consideration as it represented $3.4 billion of cash payments in fiscal year 2002. In the area of pensions, Fitch expects GM to contribute up to $15 billion over the next 5 years. Although GM is not required by law (ERISA), under a reasonable scenario, to contribute until the 2006 calendar year, this does not alleviate GM from substantial requirements in the near-term as a failure to contribute would increase the contribution requirements beyond 2006. Given GM's fiscal year 2002 U.S. pension benefit payments of $6.5 billion, it is clear that GM will have to make additional contributions into the pension funds to improve its pension funded status.
Despite many of these negative headwinds, GM has made positive progress on many fronts. Liquidity remains strong with $20.6 billion in cash and net liquidity of $5.6 billion (as of the end of Q1, 2003 and including short-term VEBA). Another success story has been quality. Vehicle quality, as measured by surveys such as J.D. Powers and by data such as levels of recalls and warranty costs, has improved substantially from the mid 1990s. On productivity, as per the 2003 Harbour Report GM continues to close the productivity gap with the automotive industry leaders with a 7.4% overall improvement in manufacturing productivity. GM remains the domestic leader in manufacturing productivity. GM's purchasing operations have not only provided substantial negotiated price decreases but GM is also more increasingly focused on getting design and engineering waste out of vehicle design process. Due to productivity and elimination of waste, GM's overall cost position, not including pension and healthcare costs, is more competitive today than it was 5 years ago.
However, during the same 5 years, GM along with other auto manufacturers has given the UAW workers a rich 1999 contract. In the current competitive pressures (negative pricing and market share) environment, Fitch believes that GM would not be able to withstand the negative impact of a repeat UAW contract. Therefore, Fitch believes that the upcoming contract negotiation must yield the potential to improve operating performance and that failure to do so is the principal rating risk at this time.
Ratings Downgraded To/From General Motors Corp. -- Senior Debt 'BBB+' 'A-'. General Motors Acceptance Corp. -- Senior Debt 'BBB+' 'A-'. General Motors Acceptance Corp. of Canada -- Senior Debt 'BBB+' 'A-'. GMAC Australia (Finance) Ltd. -- Senior Debt 'BBB+' 'A-'. GMAC International Finance B.V. -- Senior Debt 'BBB+' 'A-'. General Motors Acceptance Corp. Nederland N.V. -- Senior Debt 'BBB+' 'A-'. Opel Bank GmbH -- Senior Debt 'BBB+' 'A-'. General Motors Acceptance Corp. (N.Z.) Ltd. -- Senior Debt 'BBB+' 'A-'. GMAC Commercial Mortgage Bank Plc. -- Senior Debt 'BBB+' 'A-'. GMAC Commercial Mortgage Japan K.K. -- Senior Debt 'BBB+' 'A-'. Ratings Affirmed General Motors Corp. -- Commercial Paper 'F2'. General Motors Acceptance Corp. -- Commercial Paper 'F2'. General Motors Acceptance Corp. (U.K.) Finance Plc. -- Commercial Paper 'F2'. Opel Bank GmbH -- Short-term 'F2'. GMAC Commercial Mortgage Bank Plc -- Euro Commercial Paper 'F2'. -- Short-term deposits 'F2'. General Motors Acceptance Corp. (N.Z.) Ltd. -- Commercial Paper 'F2'. GMAC Commercial Mortgage Japan K.K. -- Short-term 'F2'.