GM Corp Outlook to Negative by Standard & Poor's
4 August 1998
General Motors Corporation Outlook to Negative by Standard & Poor's; Ratings Affirmed
NEW YORK, Aug.3 -- Standard & Poor's today affirmed its
ratings on General Motors Corp. and various related entities (see
list below), following the announcement that GM intends to divest its
components operations, Delphi Automotive Systems (Delphi), during 1999.
The outlook of GM and General Motors Acceptance Corp. is revised to
negative from stable.
Over the long range, the separation of Delphi could eliminate the
competitive disadvantage of GM's relatively high degree of vertical
integration. However, the negative outlook reflects the significant
challenges GM faces to effect the divestiture, while avoiding exacerbating its
already-strained labor relations, and while realizing appropriate value for
its investment in Delphi. In particular, considerable uncertainty exists
regarding:
-- The reaction to this move by GM's principal labor unions. GM's labor
relations are poor, as highlighted by recent work stoppages, and the company
faces the expiration of its national labor contracts in the U.S. and Canada in
September 1999;
-- The extent to which GM might have to provide ongoing operating and
financial support to Delphi -- for example, in the form of long-term supply
contracts; and
-- The financial structure of the divestiture, including the amount of
any proceeds to be retained by GM.
Ratings could be lowered in the near term with the recurrence of labor
conflicts, or if the Delphi transaction does not adequately offset any
distribution to GM shareholders with the promise of better efficiency.
GM's ratings continue to reflect its above-average business position as
the world's largest automaker, and its exceptional financial flexibility. The
cost position of GM's core North American automotive operations (NAO) has
improved significantly since the early 1990s as a result of ongoing efforts to
contain material costs, enhance labor productivity, lower employment levels,
and rationalize its internal components operations. However, NAO remains a
relatively high-cost producer, and it still faces considerable challenges in
bolstering its competitiveness. In this regard, the difficulty of achieving
further gains in operating efficiency was highlighted by the recent, costly
work stoppages, which resulted in substantial lost production. In addition,
although new vehicles launched in recent years have been generally well-
received, the ability of NAO to stabilize its market share remains uncertain.
Although the recently resolved work stoppages at NAO have had a major
impact on financial performance since mid-June (costing the company several
billion dollars in after-tax earnings), profitability is now expected to
recover rapidly as production is resumed. GM generated very strong overall
earnings and cash flow in recent years, largely reflecting the effectiveness
of restructuring measures implemented at NAO -- amidst cyclically favorable
market conditions -- as well as the substantial contributions of its
automotive finance unit (GMAC), and of its international automotive
operations. The near-term prospects of the latter are now clouded by fierce
price competition in Europe and by economic turmoil in various developing
countries. However, recently-initiated cost cutting actions should help to
restore GM's European operations to adequate profitability. Also, over the
long term, based on ongoing investment projects, GM is very well-positioned to
capitalize on growth in automotive demand outside its established markets.
Moreover, the improved competitive profile of NAO lends comfort that GM will
be able to maintain adequate financial performance, even when the inevitable
cyclical downturn in North America occurs.
Importantly, management continues to pursue a balanced financial policy.
The company had taken advantage of robust cash generation in recent years to
reduce its formerly huge unfunded pension liability to a manageable level and
to accumulate a large cash position -- while taking actions to directly reward
shareholders, such as repurchasing shares. Although its surplus liquidity has
been significantly eroded by the strikes, Standard & Poor's assumes that GM
will be able to rebuild its cash reserves within the next year.
OUTLOOK: NEGATIVE
Ratings could be lowered in the near term with the recurrence of labor
conflicts, or if the Delphi transaction does not adequately offset any
distribution to GM shareholders with the promise of better efficiency.
-- CreditWire
OUTSTANDING AFFIRMED RATINGS AND OUTLOOK REVISED TO NEGATIVE
General Motors Corp. Ratings
Corporate credit rating A
Short-term corporate credit rating A-1
Senior unsecured debt A
Preferred stock A-
Preference stock A-
Equipment trust certificates A
Commercial paper A-1
General Motors Acceptance Corp.
Corporate credit rating A
Short-term corporate credit rating A-1
Senior unsecured debt A
Commercial paper A-1
OUTSTANDING AFFIRMED RATINGS:
Hughes Electronics Corp.
Corporate credit rating A-
Short-term corporate credit rating A-2
Senior secured debt A-
Commercial paper A-2
PanAmSat Corp.
Corporate credit rating A-
Short-term corporate credit rating A-2
Senior unsecured debt A-
Bank loan A-
Commercial paper A-2