DBRS Assigns Ratings of BB and Provisional BBB (low) to General Motors

DBRS has today assigned an Issuer Rating of BB to General Motors Company and to General Motors Holdings LLC (collectively, GM or the Company). Additionally, pursuant to our leveraged finance rating methodology, DBRS has assigned provisional recovery and instrument ratings of RR1 and BBB (low), respectively, to GM’s anticipated Secured Credit Facility. The trends are Stable.

The ratings reflect the much-improved business risk and financial risk profiles of GM relative to those of General Motors Corporation (Old GM) prior to its bankruptcy process in the United States last year. DBRS notes that Old GM’s bankruptcy and the subsequent 363 Sale of substantially all of its assets to the Company resulted in substantial reductions of debt and liabilities. GM has since made further significant paydowns of its debt, with the Company having a sizeable net cash position and solid balance sheet as of June 30, 2010. While this is somewhat offset by GM’s significant underfunded pensions, DBRS notes that the Company’s strong liquidity position provides some flexibility in addressing its underfunded U.S. pension liabilities (although the Company has no expected material mandatory U.S. pension contributions until 2014).

The Company has substantially completed the restructuring of its operations in North America (which remains its dominant segment, notwithstanding the expected rising prominence of emerging markets going forward). This has been achieved through several measures, including brand rationalization, manufacturing capacity reductions, ongoing contractions in its dealer network, salaried and hourly workforce reductions, labour agreement restructuring and the transfer of hourly retiree healthcare obligations to the new Voluntary Employee Beneficiary Association (New VEBA) in the United States. Accordingly, GM’s cost position in its home market has been notably lowered, with its profitability (EBIT) break-even point for its North American operations estimated by the Company to be approximately 10.5 million to 11.0 million industry unit sales in the United States (based on current market share). Such volumes (while representing a slight increase vis-à-vis last year’s historically low levels of 10.6 million units), are materially below DBRS’s forecast of 11.5 million to 12.0 million units for 2010 amid what remains a modest recovery in the automotive industry. In the event that industry volumes were to approach trend demand (estimated to be at least 15 million units), GM’s North American operations would be expected to become significantly more profitable given the high operating leverage of its business.

However, DBRS notes that the Company continues to face significant challenges, most notably with respect to the attempted restructuring of its European operations following its November 2009 decision to retain Adam Opel GmbH (Opel) after initially contemplating a divestiture of this subsidiary. Additionally, in its native U.S. market, Old GM lost considerable share prior to its bankruptcy proceedings in June 2009. This market share loss was exacerbated in late 2009 by GM’s reduction to four brands and the aforementioned contraction of its dealer network, as well as ongoing negative public perception stemming from the bankruptcy proceedings last year. The Company has attempted to address the latter concern in several ways, including the expedited repayment of the U.S. Treasury (UST) and Export Development Canada (EDC) loans, both of which were fully paid in April 2010. GM’s anticipated initial public offering (IPO) is also expected to recover an additional portion of the U.S. government’s investment in the Company; this may further improve the public opinion of GM in its home market. DBRS notes that the Company’s four-brand market share has essentially stabilized from late 2009 through September 2010, partly due to several recent strong vehicle launches. However, this product momentum must be maintained to avoid possible future share losses, particularly in the context of expected gains in the United States by several auto manufacturers, including Hyundai Motor Company, Volkswagen AG and Toyota Motor Corporation. As such, forthcoming model launches, including the Chevrolet Cruze and Chevrolet Volt, remain important. The Volt extended-range electric car, while not expected to sell in large volumes, is critical for GM given the aim of raising the Company’s profile in fuel efficiency and environmental responsibility.

GM’s performance through the first half of this year has considerably improved vis-à-vis 2009 results. Through the first two quarters of 2010, the Company generated positive EBIT of $1.8 billion and $2.0 billion, respectively. DBRS notes that the main factor behind the improved performance lies in the turnaround in North America, where EBIT was positive in the amounts of $1.2 billion and $1.6 billion for the three-month periods ending March 31, 2010, and June 30, 2010, respectively.

GM North America (GMNA) revenues through the first half of 2010 increased significantly, in line with rising industry volumes that in the second quarter were also bolstered by gains in market share. GM’s average retail transaction prices have also been strengthening considerably across all vehicle segments. Additionally, despite moderately higher incentive spending in Q2 2010, DBRS notes that the Company’s incentive levels have been trending lower. This has been facilitated by several recent product launches that have been well received in the marketplace, including the Buick LaCrosse, Chevrolet Equinox and Cadillac SRX. GMNA’s 2010 results reflect the significant progress achieved through the extensive restructuring of its operations, with its cost position now at a level that enables this segment to maintain break-even profitability, even at low industry levels. DBRS also notes that the Company’s acquisition of AmeriCredit Inc. (AmeriCredit, to be renamed General Motors Financial Company, Inc.) could potentially bolster sales through the offering of sub-prime lending and leasing, which was substantially curtailed following GM’s sale of its majority position in Ally Financial Inc. (Ally, rated BB low, Stable by DBRS; 16.6% owned by the Company), which continues to be a significant source of prime retail and wholesale financing for the Company. DBRS observes, however, that any repeated foray into sub-prime lending is not without risk, particularly given ongoing economic headwinds in the United States and the possibility of a double-dip recession.

While essentially complete in North America, the operations of GM Europe (GME) still face significant restructuring. In June of this year, the German government indicated that it would not provide any loan guarantees in support of GME, prompting the Company to withdraw all applications for government loan guarantees from European nations. As such, GM plans to fund GME’s requirements internally. Through the first half of 2010, of the Company’s three geographic operating segments, GME is the only one to incur losses. Its break-even production level continues to exceed demand, which has contracted this year following the cessation of vehicle scrappage programs (which significantly boosted vehicle sales in 2009) amid ongoing economic headwinds. As such, GME is looking to decrease its production capacity by approximately 20%, including the permanent closure of the Company’s assembly facility in Antwerp, Belgium (headcount reductions are expected to total about 8,300 jobs, of which roughly 7,000 are in manufacturing). Through these measures and a significant renewal of its product line, GM’s objective is to have GME achieve break-even (EBIT) profitability (excluding restructuring charges) in 2011. DBRS considers this target somewhat aggressive, as success significantly rests on the positive market reception of the Company’s planned new models, with GM also hoping to minimize negative public perception associated with the headcount reductions planned across Europe.

Regarding GM’s International Operations (GMIO), this segment is highly profitable for the Company. GM is engaged in numerous joint ventures in this region, which, including the JV vehicle sales, generate the highest vehicle sales volumes for the Company. DBRS notes that GM is well positioned in emerging markets, with the Company partly benefiting from its relatively early entry vis-à-vis other auto manufacturers. Market share (including Old GM) in the Brazil, Russia, India and China (BRIC) region has progressively grown from 9.8% in 2004 to 12.7% in 2009. In Brazil, which is the world’s fifth largest automotive market, GM enjoys a strong number-three position and 19.0% market share as of 2009. In China, the world’s largest automotive market (accounting for more half of GMIO’s volumes), the Company (including its JVs) has a market share estimated at above 13%. DBRS notes that these emerging markets represent the primary source of growth for the global automotive industry going forward. Through increasing use of its global architectures and further collaboration with its JV partners, the Company plans to introduce several new models in the GMIO region through the end of 2012 and further entrench its solid position. DBRS expects this segment to continue generating solid earnings for the foreseeable future.

With respect to GM’s financial profile, DBRS notes that this was dramatically bolstered through Old GM’s bankruptcy and subsequent 363 Sale of substantially all of its assets to the Company. As of July 10, 2009 (the date on which GM commenced operations as a new company), GM’s debt obligations totalled $15.7 billion (vis-à-vis Old GM’s immediately previous debt balances of $48.3 billion). GM’s initial liquidity position was also very strong, consisting of cash balances of $19.2 billion (which did not include additional restricted cash balances of $19.1 billion). Subsequently, in the intervening period, given further paydowns in indebtedness from free cash flow and the release of restricted cash, GM’s total debt obligations have been further reduced to $8.2 billion as of June 30, 2010. As of the same date, GM’s cash balances (further bolstered by the release of significant restricted cash), and marketable securities totalled $31.5 billion, with the Company therefore having a net cash position of $23.3 billion. DBRS notes that GM’s liquidity and net cash position are very strong and rank favourably relative to its peers.

However, this is somewhat offset by the Company’s sizeable underfunded pension plans, which as of June 30, 2010, totalled $26.3 billion (consisting of $16.7 billion of underfunded U.S. pensions and $9.6 billion of non-U.S. underfunded pensions). While significant both in absolute terms and relative to its peers, DBRS notes that GM’s underlying pension amounts remain subject to considerable volatility given their sensitivities to discount rates and asset plan returns. Additionally, GM is not expected to be required to make any material mandatory contributions to its U.S. pensions until 2014. Given its strong liquidity position, GM would appear to have some flexibility in addressing its pensions. DBRS further notes that the Company has outlined a very conservative financial policy going forward and has expressed its commitment toward minimizing financial leverage (given the high operating leverage of its business). GM plans to use excess cash to repay debt and to make discretionary contributions to its U.S. pension plans.

DBRS expects the assigned ratings to remain constant over the near term. Notwithstanding significant headwinds in Europe, GM is well positioned to benefit from the eventual recovery of the global auto industry. While a significant deterioration in results and credit metrics would have negative rating implications, DBRS considers this unlikely, noting the Company’s strong liquidity position and solid recent results amid industry conditions that remain weak (albeit moderately improving). Alternatively, should GM achieve a turnaround in Europe or significantly reduce its underfunded pensions while maintaining a strong liquidity position, DBRS would consider upgrading the ratings.

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

The applicable methodologies are Rating Automotive and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.