S&P Affirms Ratings for General Motors, GMAC

10 June 1999

S&P Affirms Ratings for General Motors, GMAC

    NEW YORK--Standard & Poor's CreditWire--June 9, 1999--Standard & Poor's today affirmed its ratings for General Motors Corp. (GM) and its subsidiary, General Motors Acceptance Corp. (GMAC), following the announcement that GMAC has signed a definitive agreement to acquire BNY Financial Corp. (unrated), a unit of the Bank of New York, for $1.8 billion in cash. (See list below) The outlooks of GM and GMAC remain negative.
    BNY Financial Corporation is the leading provider of factoring and asset-based lending services in the U.S., Canada, and the U.K. Completion of the proposed transaction, which is targeted to occur by the end of the second quarter, would increase GM's consolidated financial leverage, in the absence of offsetting actions. Standard & Poor's believes this acquisition would also increase business risk, since it would represent a significant extension of GMAC's operations beyond its core automotive finance function and other areas of established expertise. However, amid current highly favorable conditions in the North American automotive market, GM has sufficient leeway to absorb this transaction without immediately calling its ratings into question.
    The ratings reflect General Motors Corp.'s (GM) above-average business position as the world's largest automaker and its exceptional financial flexibility. Earnings and cash flow have been generally strong over the past four years, largely reflecting the effectiveness of restructuring measures implemented in North America, as well as robust industry demand. A 53-day work stoppage in North America had a major impact on full-year 1998 financial performance, although profitability rebounded once production resumed. The cost position of GM's core North American automotive operations has improved significantly since the early 1990s as a result of ongoing efforts to contain material costs, capitalize on component commonalities among vehicles, enhance labor productivity, and lower employment levels. Over time, as existing long-term supply contracts expire, GM's recently completed spin-off of its internal components group, Delphi Automotive Systems Corp. (Delphi), may result in substantial savings in component sourcing costs and eliminate the competitive disadvantage relatively high degree of vertical integration. Still, GM's North American unit remains a relatively high-cost producer. Also, the Delphi divestiture could complicate the already difficult relationship with GM's and Delphi's principal labor union, the United Auto Workers. Moreover, GM's market share in North America has continued to erode, although new vehicles launched in recent years have been generally well-received.
    Notwithstanding diversification efforts at GMAC, GM's overall financial performance is now much more dependent on the results of its North American automotive operations than previously, given the divestitures in recent years of Delphi, its aerospace and defense unit, and its information processing business. In addition, the aggregate earnings contribution of its international automotive operations is relatively weak at present: although results in Europe have improved in the past several quarters from the sub-par levels of 1997-1998, its Latin American operations have been severely affected by economic turmoil.
    Management continues to pursue a balanced financial policy. The company took advantage of robust cash generation in recent years to reduce its formerly huge unfunded pension liability and to accumulate a large cash position while taking actions to directly reward shareholders, such as repurchasing shares. GM's financial position was be further bolstered with the completion of the Delphi transaction.

    OUTLOOK: NEGATIVE

    The ratings could be lowered if GM encounters setbacks in implementing further improvement in its North American automotive operations. In particular, this might result from labor conflicts (the company faces bargaining to renew its national labor contract in September 1999) or GM's failure to stabilize market share. In addition, accelerating debt-financed acquisitions at GMAC would be a cause for concern Standard & Poor's said.--CreditWire


RATINGS AFFIRMED

General Motors Corp.                          Ratings
  Corporate credit rating                       A
  Short-term corporate credit rating            A-1
  Senior unsecured debt                         A
  Preferred stock                               BBB+
  Preference stock                              BBB+
  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