DBRS Comments on Judge’s Approval of GM’s Bankruptcy Sale

DBRS notes that the bankruptcy sale (the Sale) of General Motors Corporation (GM or the Company) was approved by the presiding judge on Sunday, July 5, 2009. DBRS views the approval positively as it will allow the Company’s most profitable assets to exit court protection and potentially enable GM to quickly emerge from bankruptcy protection. (A four-day stay of the order approving the Sale was also issued to allow for possible appeals. As such, the Sale can possibly close as early as Thursday, July 9, 2009.)

Under the Sale, GM’s strongest operations will be sold to NGMCO, Inc. (NGMCO), an entity funded by the U.S. Treasury. Upon closing, NGMCO will change its name to General Motors Corporation and continue to operate under GM’s former corporate and sub-brands. DBRS notes that the process is similar to that which was applied to Chrysler, which was able to successfully emerge from bankruptcy protection in only 41 days with a new strategic partner, Fiat S.p.A. In the case of GM, upon emerging from bankruptcy, its ownership will be distributed as follows:
– 60.8% owned by the U.S. Treasury.
– 17.5% by the United Auto Workers Retiree Medical Benefits Trust.
– 11.7% by the governments of Canada and Ontario.
– 10.0% by the former GM.

DBRS views the approved Sale positively as it likely enables GM to rapidly emerge from bankruptcy protection. If the Sale had not been approved, DBRS notes that a liquidation through an extended bankruptcy process would likely have resulted, which would have had severe adverse consequences for several of GM’s stakeholders. The U.S. government indicated that its funding support of GM could have been withdrawn in the event that an agreement was not reached by July 10, 2009. Additionally, an extended bankruptcy would cause further disruptive effects not only to GM operations, but also to suppliers and dealers. Finally, DBRS notes that GM’s sales and market share would likely have continued to decline substantially in the event of a protracted bankruptcy scenario, with the much reduced revenue stream seriously undermining the potential recovery of the Company.

Upon emergence from bankruptcy, GM should have a much stronger balance sheet and lower cost structure relative to the former company. However, DBRS notes that a successful recovery ultimately depends on consumer acceptance of the new products that are to be launched by the Company. Additionally, the U.S. automotive industry remains at historical lows; even a modest recovery in economic conditions and industry volumes would considerably facilitate GM’s potential recovery to profitability.

Notes:
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.