General Motors and GMAC's Debt Ratings Upgraded by DCR
21 March 2000
General Motors and GMAC's Debt Ratings Upgraded by DCR
CHICAGO, March 20 Duff & Phelps Credit Rating Co. (DCR)
has raised the debt ratings for General Motors Corporation (GM) and its
financial services subsidiary, General Motors Acceptance Corp. (GMAC). The
senior unsecured debt of GM and GMAC is raised to 'A' (Single-A) from 'A-'
(Single-A-Minus) and GM's preference stocks and preferred securities are
raised to 'A-' (Single-A-Minus) from 'BBB+' (Triple-B-Plus).
With the upgrade, the Rating Outlook has been changed to Stable from Positive.
Also, GM and GMAC's commercial paper rating of 'D-1' (D-One) has been
reaffirmed. GM and GMAC had total debt outstanding at December 31, 1999 of
approximately $130 billion.
The rating action is due mainly to improving performance in GM's core
North American automotive operations (GMNA) and significant strengthening of
GM's financial condition. Also, the rating action reflects GM's approach of
utilizing strategic, cross-ownership alliances with other automakers, which
conservatively protects GM's current financial condition, to achieve most of
the desired benefits of the industry's global consolidation. For GMAC,
specifically, the rating action acknowledges the results of tightened
underwriting guidelines in financing contracts, the opportunistic investments
to attain significant growth in non-automotive areas, and the current
financial policy of retaining earnings to improve its capitalization and
reduce its financial leverage.
Product initiatives and continuing cost actions have boosted GMNA's
profitability up to a comparable run rate for the last three quarters that is
significantly closer to leading competitors. Along with the improved
profitability, asset utilization (asset turnover) is also substantially
improving to drive a higher return on net operating assets. While GMNA
continues to struggle in some product segments and with certain individual
models, it has started to stabilize overall market share and looks to have
strengthened the innovation in its product development pipeline. Cost savings
efforts will continue to be a major focus, but the improving labor relations
over the last year is lowering the possibility that cost reduction issues will
result in major labor disruptions.
While GM's net liquidity (the net of its automotive cash minus its debt
and preferred securities) has been relatively steady for three years, GM is
substantially improving the funding of its retirement liabilities and
therefore strengthening its financial condition. In its U.S. pension plans,
the pace of recent contributions along with the strong market for investment
returns has resulted in a more than fully-funded plan on a FASB basis, not
just an economic basis as before, while GM has utilized VEBA structures to
begin funding other postretirement liabilities. The funding status of these
liabilities will further improve with the planned $7 billion contribution of
Class H stock this summer. Going forward, GM will have greater flexibility in
making retirement plan contributions, as additional pension funding
requirements have been eliminated for the foreseeable future, while the strong
free cash flow generation and higher profitability (and corresponding higher
capacity for tax deductions) of GMNA should easily allow further discretionary
funding.
However, GMNA still lags competitors such as Ford and DaimlerChrysler in
profitability, due in large part to product mix, and needs to continue
improving its product development performance to further reduce the lifecycle
throughout its product portfolio to combat the unrelenting wave of new
competitive product introductions. Also, GM Europe continues to face an
extremely competitive environment.
DCR is a leading global rating agency with 34 local market offices
providing ratings and research on debt issues and insurance claims paying
ability in more than 50 countries. For additional information, visit DCR's
Web site at http://www.dcrco.com. DCR's research is also available on
Bloomberg at DCR, First Call's BondCall Direct/Research Direct at
http://www.firstcall.com and Multex at http://www.multex.com, as well as
through other third-party providers.