DBRS Dwgrades GM & Rel. Co. to BBB(low), R-2(low), Trd Neg

Dominion Bond Rating Service (“DBRS”) has today downgraded the ratings on General Motors Corporation (“GM” or the “Company”) and General Motors of Canada Limited as indicated above. The trends remain Negative.

Since the last rating actions on March 16, 2005, the Company’s North American operating performance continued to be weak with declining shipment and market share. The Company has withdrawn its lowered earnings (excluding special items) guidance of US$1 to US$2 per share for 2005 as well as its operating cash flow target of a deficit of US$2 billion in 2005, before the Fiat S.p.A. (“Fiat”) settlement. Although sales of new models are gathering momentum, they are not sufficient to stabilize GM’s market share loss. The continuing sharp decline in the sales of large sport-utility vehicles (SUVs) and the recent slowing sales of pick-up trucks, GM’s most profitable segments, are worrying developments, and GM’s profitability in 2005 could be well below DBRS’s expectation at the time of the most recent rating action. In addition, the downgrade of the Commercial Paper rating from R-2 (high) to R-2 (low) reflects GM’s much reduced access to the unsecured markets. Recent negative rating actions have driven up borrowing costs significantly for GM making borrowing in the unsecured market uneconomic, although GM still has good access to the secured markets.

Structural factors contributing to the deterioration at the automotive operations have remained and are as follows:
(1) The Company has not been able to stabilize market share loss despite a number of new model introductions.
(2) Ongoing use of high sales incentives to support sales in response to competitive pressure erodes profit margins. Although the Company has exercised restraint recently, GM remains the most aggressive in the use of incentives.
(3) High gasoline prices have contributed to a shift to smaller SUVs from the more profitable large SUVs, which further depresses profit. The aging of the product line (the last year of the large SUV product cycle) adds to the challenge.
(4) The large legacy costs (pension and post-retirement benefits) continue to depress earnings at GM. The Company has limited success in controlling health care inflation, with expenses expected to increase by US$1 billion on a year-over-year basis. The recent sharp rise in commodity prices (steel and resin) further increases the cost base.
(5) GM still has too much capacity in its North American operations despite ongoing downsizing efforts. Slowing sales and higher than normal dealer inventory is likely to weigh on production and worsen the already low capacity utilization.

Nevertheless, the current ratings are supported by the following factors:
(1) GM is on the verge of launching new products based on the new T900 platform. The brand new large SUVs (in 2006) and pick-up trucks (in 2007) are GM’s largest and most profitable products. The success of these vehicles may be able to mitigate the deteriorating performance at its North American operations.
(2) GM continues to have strong liquidity (gross cash including short-term VEBA at US$19.8 billion at the end of March 2005) even though based on DBRS’s estimates the near-term deficit in free cash flow and the Fiat settlement would lower the cash position. A modest debt maturity schedule (average debt maturity of 19 years) adds to financial flexibility. The North America pension plans are fully funded and have no need for further contributions.
(3) GM has a highly profitable finance subsidiary, General Motors Acceptance Corporation (“GMAC”). GMAC is expected to continue to keep GM profitable on a consolidated basis despite a rising interest rates environment as well as higher borrowing costs, and is a source of liquidity through dividend payments.

Hence, DBRS believes that GM is still investment grade.

The Negative trends reflect that GM continues to face significant challenges in the near to medium term. Competition is expected to remain intense, and the continuing favourable demand for automobiles in North America is uncertain. More importantly, the execution of the T900 platform launch will be critical. Any problems and delays in introducing the new products could be critical to the turnaround of GM’s North American operations. Furthermore, rising gasoline prices and increasing competition in the large SUV and pick-up segments by the Asian manufacturer could limit the success of the new products.

DBRS is hosting a teleconference today, Thursday May 26, 2005, at 1:30 pm EDT to discuss the rating actions.

To participate in the teleconference, please dial the appropriate numbers listed five minutes before the start time.

North America callers: 1-800-387-6216
International callers: + 1-416-405-9328
Confirmation code is 3154836

Note:
y - This security has certain unique covenants that give it equity-like characteristics.