Fitch Ratings Lowers GM & GMAC; Outlook Remains Negative

CHICAGO--Sept. 26, 2005--Fitch Ratings has downgraded the ratings of GM, GMAC and related subsidiaries to 'BB' from 'BB+' due to a lack of tangible progress in reducing its fixed cost structure (including escalating health care costs and liabilities), the incrementally negative effect on GM's core large vehicles resulting from persistently high gas prices and heightened financial risks to GM associated with resolution of the Delphi restructuring.

In addition, recent incentive programs have established lower market pricing that makes GM increasingly vulnerable to volume declines which could occur as a result of a decline in economic conditions or simply a sustained falloff following recent industry sales spikes. Given continued top-line pressures, financial stresses in the supplier base and numerous impediments to achieving significant structural cost reductions (legacy cost and labor contract restrictions), opportunities for cost reductions have continued to narrow.

Persistently high gas prices are also expected to incrementally reduce demand for GM's large vehicles, where GM is disproportionately exposed in terms of volumes and profitability, and where its new product introductions are concentrated. Industry sale volumes in this segment saw a sharp decline in early 2005, which is likely to mute the volume impact and pricing potential of GM's new GMT-900 product series. In the absence of significant structural cost reductions, Fitch expects that negative operating cash flow (ex-working capital adjustments) is likely to deteriorate further in 2006, heightening the risks of a more fundamental restructuring and reduced liquidity (including long-term VEBA holdings) from currently healthy levels.

Fitch has become increasingly concerned with the near-term financial costs that could fall on GM as part of Delphi's restructuring. Although the restructuring, in or out of court, is not currently expected to result in any interruption of supplies to GM, the risks of disruption during the adjustment process cannot be ruled out. The risk of a work stoppage could arise, however, in the event that GM does not, in the UAW's view, fully meet the obligations that GM may have to Delphi workers. The bulk of the restructuring costs, within or outside of bankruptcy, are expected to fall on the UAW through headcount reductions, facility closures and wage and benefit reductions.

Although GM will benefit over the longer term by Delphi's expected lower cost structure and the ability to re-source product away from Delphi, Fitch is concerned about the short-term costs or other forms of financial support necessary to restore Delphi's financial position to viability. Of concern to Fitch is a revision of existing pricing wherein GM is forced to absorb meaningfully higher costs on a significant portion of its supply chain. Restructuring benefits would largely accrue to Delphi in the near term, with GM benefiting only over an extended time period. Fitch believes that GM could utilize a portion of its liquidity to accelerate workforce reductions at Delphi.

In the event of a Delphi bankruptcy, Fitch expects that GM would also be absorbing substantial Delphi legacy costs in the form of pension and OPEB obligations. OPEB-related cash outflows are relatively modest (projected at $216 million in 2005) but accelerate sharply over the next four years. The ultimate cost and timing of Delphi's pension obligations that would be absorbed by GM is unknown. Due to the fact that GM is behind the PBGC, it is Fitch's assumption that GM will not absorb the plans (or the required contributions) but would be contingently liable for meeting certain benefit levels.

Fitch expects that cash outflows associated with these obligations would be very long-term in nature. Pension benefits paid out by Delphi are projected at $556 million in 2006, growing rapidly through 2009. OPEB and pension benefit outflows at Delphi and GM will be further increased as headcount reductions are accelerated at both entities. Reducing the OPEB liability is clearly a top priority for GM in the short term and in the 2007 UAW contract negotiations. Because the pension and OPEB obligations are long-term in nature (and because the OPEB obligations are likely to me modified during this time), Fitch believes that GM could allow a Delphi bankruptcy and absorb these longer-term liabilities if GM is able to benefit on the cost side in exchange.

Although GM is currently well-funded in its U.S. pension plans, several years of low asset returns could result in an underfunded position due to high level of benefits outflows. In addition, pending pension legislation could result in a re-measurement of liabilities and higher required contributions.

Regarding GM's negotiations with the UAW regarding health care, Fitch believes that there may be progress in working toward a negotiated solution. Fitch expects that modest progress will be made in the short term, but that the more significant event will be the 2007 contract negotiations, at which point event risk could be high. Given Fitch's expectation of negative cash flows through 2006, even significant progress in reducing the cash outflows related to health care liabilities will be unlikely to restore GM to cashflow breakeven levels.

GM retained liquidity of approximately $20.2 billion in cash and short-term VEBA at June 30, 2005, plus $16.2 billion currently held in long-term VEBA. GM's liquidity profile also benefits from substantial cash holdings at GMAC, and the ability to shrink GMAC's balance sheet or monetize assets. Although liquidity currently remains healthy, Fitch expects that negative operating cash flows (ex working capital) will deteriorate further in 2006 due to reduced unit sales, continuing price erosion and adverse mix. Coupled with any cash applied to resolve the Delphi and health care issues, long-term VEBA could be reduced meaningfully as GM applies these funds to permitted expenditures.

Fitch is also concerned with the potential reduction in credit available to the automotive sector. Extended payment terms have long been an industry practice, and trade credit has become a critical part of the liability structure of the OEMs and their suppliers. Suppliers have also traditionally relied on the ability to finance OEM receivables. As the automotive supply chain comes under increasing financial stress and financial intermediaries limit credit exposures throughout the industry, restrictions on access to external financing and trade credit could have significant repercussions on GM and throughout the industry.

Ratings lowered with a Negative Rating Outlook:

General Motors Corp.

General Motors Acceptance Corp.

GMAC International Finance B.V.

General Motors Acceptance Corp., Australia

General Motors Acceptance Corp. of Canada Ltd.

GMAC Bank GmbH

General Motors of Canada Limited

General Motors Acceptance Corp. (N.Z.) Ltd.

GMAC Commercial Funding Asia K.K. (formerly GMAC Commercial Mortgage Japan K.K.)

-- Senior debt to 'BB' from 'BB+'.

Residential Capital Corp.

GMAC Bank

-- Senior debt to 'BBB-' from 'BBB'.

S-T ratings lowered:

Residential Capital Corp.

GMAC Bank

-- Short-term to 'F3' from 'F2'.

Ratings affirmed:

General Motors Corp.

General Motors Acceptance Corp.

GMAC International Finance B.V.

General Motors Acceptance Corp., Australia

General Motors Acceptance Corp. of Canada Ltd.

GMAC Bank GmbH

General Motors of Canada Limited

General Motors Acceptance Corp. (N.Z.) Ltd.

GMAC Commercial Funding Asia K.K. (formerly GMAC Commercial Mortgage Japan K.K.)

General Motors Acceptance Corp. (U.K.) Plc

GMAC Australia Finance

-- Short-term 'B'.

GMAC Bank

-- Individual 'B/C'.

Rating Watch revised to Positive from Evolving:

GMAC Commercial Mortgage Bank

-- Long-term deposits 'BB+';

-- Senior debt 'BB+' ;

-- Short-term deposits 'B';

-- Short-term 'B';

-- Individual 'B/C';

-- Support '3'.

GMAC Commercial Mortgage Bank Europe, plc

-- short-term ratings 'F3'.

GMAC Commercial Mortgage Funding, plc

-- Long-term ratings 'BB+'.

New rating assigned:

GMAC Bank

-- Long-term deposits 'BBB';

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