DBRS Downgrades General Motors Corporation, Trend Now Negative

DBRS has today downgraded the long-term ratings of General Motors Corporation (GM or the Company), including the Issuer rating to B (low) from B (high). Additionally, based on DBRS’s Leveraged Finance Rating Methodology (see press release dated June 9, 2008 for details), DBRS has assigned recovery and instrument ratings to GM’s Secured Credit Facilities and Long-Term Debt of RR2/B (high) and RR4/CCC (high) respectively, (the secured credit rating is a newly assigned rating, while DBRS is confirming the long-term unsecured debt). All trends are Negative. The ratings action reflects the sharp downturn in the U.S. automotive industry, combined with the dramatic shift in vehicle segmentation toward smaller vehicles and away from SUVs and pick-up trucks, which represent the Company’s traditional product strengths. This has resulted in significant cash burn associated with poor operating results (considerably below DBRS’s expectations) in the Company’s core North American operations. With this rating action, GM is removed from Under Review with Negative Implications, where it was placed on June 20, 2008.

The Company’s business profile has been significantly undermined by the dramatic deterioration of the automotive industry in North America, where aggregate demand has dropped sharply given the well-documented economic concerns in the United States. Light vehicle sales in this market are estimated to be in the range of 14.0 million units, which represents the lowest total in well over a decade. This has been exacerbated by the sharp rise in oil and fuel prices, which has resulted in a significant acceleration of the shift away from larger vehicles (such as SUVs and pickup trucks) and toward smaller vehicles (e.g., passenger cars and crossover utility vehicles (CUVs)). GM has been materially adversely impacted by these market developments as it previously focused on the larger (and typically more profitable) vehicles and as such is currently under-represented in the smaller vehicles segment. Accordingly, through June 2008, the Company’s unit sales for the year dropped 17%, relative to a total decline of 10% in the U.S. market, with GM’s market share through this period dropping to 21.3% vis-à-vis a level of 22.8% through June 2007. (DBRS notes that a portion of the lost sales is attributable to a deliberate reduction in fleet activities.)

In the second quarter (ending June 30) of 2008, the Company posted a loss of $15.5 billion. While this figure incorporates several special items that total $9.1 billion, even excluding such adjustments, GM’s loss for the quarter was $6.3 billion, of which more than $4 billion was attributable to GM’s core North American operations. Perhaps even more alarming was the very sharp drop in North American revenue, which totaled $29.7 billion in the second quarter of 2007 but plummeted to $19.8 billion in that period this year. While this decrease may be slightly exaggerated given the effects of the twelve-week long strike at American Axle & Manufacturing Holdings, Inc., DBRS notes that much of the lost production would likely have had to be undertaken by GM in any event over the course of this year. This drop in revenue aptly illustrates the challenge facing the Company, with significantly reduced volumes in addition to sharply lower average transaction prices as consumers move toward smaller vehicles. Additionally, while GM has several new car models in its product pipeline over the next 18 months, DBRS notes few of the planned introductions are expected to be high-volume models, such that they would significantly offset lost sales in the truck and SUV segments.

While North America remains GM’s core market, with a turnaround in this region vital for the Company’s long-term viability, its business profile does benefit from significant international operations, which in 2007 represented 39% of total revenues and generated $2.1 billion in earnings before taxes. (DBRS notes that the 2008 profitability of the foreign operations trails previous-year levels as of the end of the first half; however this is largely attributable to adverse currency effects and losses resulting from a one-time adjustment related to hedge accounting.)

Liquidity would appear to be satisfactory for the short-term, with the Company’s liquidity position as of June 30, 2008, totaling $21 billion. However, this represents a sharp decrease from the 2007 year-end level of $27 billion. GM recently publicly announced that its operations require a minimum level of cash in the range of $11 billion to $14 billion, (the majority of which is allocated toward supplier payments due each month). DBRS notes that given the Company’s recent cash burn rate in the context of expected severe conditions in North America through the end of 2009, GM could potentially face a liquidity crisis as 2010 approaches, absent any counteractive measures executed by the Company. Additionally, the Company’s ongoing commitments to Delphi Corporation (Delphi) as it attempts to emerge from Chapter 11 bankruptcy proceedings further strain GM’s liquidity.

To help alleviate such concerns, in mid-July several new initiatives were announced in order to bolster GM’s liquidity. These initiatives consisted of operating actions, potential asset sales and financing activities that total approximately $15 billion through the end of next year. (For details, see DBRS’s press release dated July 15, 2008.) When assessing the Company’s proposed liquidity plan, DBRS notes that there is considerable execution risk with respect to the recently announced initiatives. However, DBRS also observes that GM currently has access to approximately $5 billion in undrawn and committed bank lines. Moreover, the Company still has in excess of $20 billion in unencumbered assets that could support future secured debt financings. Further taking into account possible divestitures of non-core assets, DBRS believes that GM has sufficient measures at its disposal to ensure an adequate liquidity position through 2010.

The ratings trend remains Negative. In the event that losses and associated cash outflows escalate well above the level already anticipated, a further downgrade would be likely. DBRS notes, however, that as of January 1, 2010, GM’s prospects improve considerably as its revised labor agreement with the United Auto Workers (UAW) comes into effect, substantially improving the Company’s cost position. Furthermore, there may also be a significant level of pent-up demand for automotive vehicles by this timeframe in light of the depressed sales levels (i.e., well below secular trend) expected to persist for the remainder of 2008 and through 2009.

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