DBRS Comments on General Motors’ Announcement to Bolster its Liquidity Position through 2009

DBRS notes that earlier today, General Motors Corporation (GM or the Company) announced several new initiatives that the Company plans to undertake in order to bolster its liquidity through 2009. The activities consist of operating actions, potential asset sales and financing activities (all detailed below) that total approximately $15 billion. DBRS views the measures announced today as a significant positive step toward ensuring sufficient liquidity through the end of 2009, after which the Company obtains significant cost relief in the form of its revised labour agreement with the United Auto Workers (UAW) that becomes effective January 1, 2010. However, these measures, in isolation, are not sufficient to warrant a rating action at this time. GM’s ratings – including its Issuer Rating of B (high) – were placed Under Review with Negative Implications by DBRS on June 20, 2008.

The majority of the measures announced today by GM are in the form of operating related actions that total approximately $10 billion and include:

(1) Further salaried headcount reductions in the United States and Canada, with no new base compensation increases through the end of 2009. Additionally, health care coverage for U.S. salaried retirees will be eliminated effective January 1, 2009, although affected retirees will in turn receive a pension increase from GM’s over-funded U.S. salaried plan. Furthermore, the Company’s executives are to forego discretionary cash bonuses in 2008. These measures are projected to amount to $1.5 billion in savings in 2009.

(2) Additional savings to come in the form of capacity reductions in trucks, as well as related component, stamping and powertrain volumes. In total, truck capacity is expected to be reduced by 300,000 units in 2009 (half of which are from previously announced actions, half from new actions). The capacity adjustments are expected to result in structural cost reductions of $2.5 billion.

(3) A reduction in capital expenditures by approximately $1.5 billion in 2009. The reduced capital expenditures are primarily related to the delayed next generation SUV and large pickup program, as well as associated V8 engine development.

(4) Further optimization of the Company’s working capital usage in North America and Europe to generate approximately $2 billion, primarily with respect to lower inventory levels.

(5) Deferral of approximately $1.7 billion in payment schedules over 2008 and 2009 for the establishment of a new UAW VEBA.

(6) Suspension by GM’s Board of Directors of future dividends on common stock; this is expected to result in savings of approximately $800 million through 2009.

In addition to the operating activities mentioned above, GM also plans to increase liquidity through potential asset sales that are estimated to generate proceeds in the range of $2 billion to $4 billion. Furthermore, the Company seeks to opportunistically access global markets to raise additional liquidity. GM is currently targeting financing in the range of $2 billion to $3 billion, likely in the form of secured debt, with the Company possessing unencumbered assets of over $20 billion to support such transaction(s).

DBRS notes that GM’s liquidity position as of December 31, 2007, and March 31, 2008, totalled approximately $27 billion and $24 billion, respectively. While the rate of cash burn suggested by the above is very significant, DBRS is of the opinion that the Company’s present liquidity position (estimated to be in the range of $20 billion to $22 billion), in combination with the measures announced today, is likely sufficient to enable the Company to maintain operations through the end of 2009, despite very difficult market conditions and outlook, particularly in North America. (DBRS notes that the Company also has access to $7 billion in committed credit lines.) As of January 1, 2010, GM’s revised labour agreement with the UAW (for details, please refer to DBRS’s press release dated October 11, 2007) becomes effective. Combined with GM’s operating actions in North America, the revised agreement is expected to reduce total structural costs to approximately $26 billion to $27 billion, from a level of $33.2 billion in 2007.

Additionally, DBRS notes that GM has made considerable progress in its international operations, which in aggregate represented 39% of Company revenues in 2007 and generated $2.1 billion in earnings before taxes. However, DBRS is maintaining the Company’s ratings Under Review with Negative Implications. GM is facing very difficult conditions in its core North American market, with total U.S. auto sales for 2008 estimated by DBRS to be in the range of 14.0 million to 14.5 million units, relative to an annual average of 16.8 million units thus far this decade. This has been exacerbated by the sharp rise in oil and fuel prices, which has resulted in a significant shift in segmentation away from (traditionally more profitable) sports utility vehicles (SUVs) and pickup trucks toward smaller passenger cars. Passenger cars are the traditional strength of the Asian original equipment manufacturers; this has added to GM’s challenge in stabilizing its market share.

In summary, today's announcement by GM has a number of positive elements, but most relate to further fortification of GM's cash position. The continuing negative nature of our ratings review acknowledges that there continue to be longer term concerns around structural challenges that exist at both GM and its major markets.

Note:
All figures are in U.S. dollars unless otherwise noted.