DBRS Upgrades General Motors Company to BB (high) from BB, Trend Stable

DBRS has today upgraded the Issuer Ratings of General Motors Company and General Motors Holdings LLC (collectively, GM or the Company) to BB (high) from BB. Pursuant to DBRS’s rating methodology for leveraged finance, GM’s Secured Credit Facility has been confirmed at BBB (low) (the confirmation reflects the instrument rating ceiling of BBB (low) as per the revised methodology dated June 2011). The trend on all ratings is Stable.

The upgrade of the Issuer Ratings reflects the Company’s continuously improving performance, with GM becoming significantly profitable from 2010 through the first half of 2011. The Company’s progress in its core North American market has been impressive amid industry conditions that, while improved vis-à-vis the recent automotive downturn, remain well below historical norms. Additionally, GM has further bolstered its financial profile as the Company paid down $10.9 billion (on a net basis) of industrial indebtedness in 2010. As of June 30, 2011, the Automotive operations had a substantial net cash position of $28 billion (including marketable securities), with the Company’s $5 billion Secured Credit Facility also being undrawn.

The Company’s earnings performance in 2010 through the first half of 2011 has been solid, mostly based on strong results of GM’s North American operations (GMNA). GMNA’s earnings incorporate higher volumes and firmer pricing that are not only a function of moderately improving industry conditions but also reflect GM’s success in introducing new vehicle models, most of which have been well-received in the marketplace and attained higher pricing and market share as a result. Recent examples of this include the Chevrolet Equinox and Cruze models, as well as the Buick LaCrosse. DBRS also notes that while GMNA’s sales continue to be overweighted in trucks, many of the Company’s recent car model launches have also proven successful and competitive in their respective segment(s), with the product range therefore being meaningfully expanded. This product momentum has also helped GM stabilize its market share after the Company contracted to four brands (from eight previously).

While GM’s recent product momentum is noteworthy, DBRS believes that the significant profitability of GMNA largely reflects the much-reduced cost position of this segment, with breakeven production levels estimated at industry volumes of approximately ten million units (based on current market share). (DBRS projects U.S. industry sales in 2011 to total approximately 12.5 million units, which, while moderately higher year-over-year, remains well below historical norms.) DBRS notes that the Company recently negotiated a new four-year agreement with the United Auto Workers (UAW) union. While a prudent resolution of the negotiations was expected, DBRS views positively GM’s ability to secure a new labour agreement without significantly increasing the fixed cost base of the North American operations, with the breakeven production level of GMNA being essentially maintained and enabling the Company to remain competitive in North America.

However, even though GM is well diversified geographically, DBRS notes that the performance of the Company is presently too dependent on North America, which has recently represented more than 70% of the operating earnings of the Automotive segment. GM continues to undertake restructuring activities regarding the operations of GM Europe (GME). GME’s restructuring concerns the implementation of capacity and headcount reductions such that the segment’s breakeven production levels would more closely match actual demand. To this end, the Company has permanently closed its assembly facility in Antwerp, Belgium, while also effecting significant staffing decreases at its facilities in Bochum, Germany. GME is also undertaking a broad product offensive in Europe, with over 30 new vehicle models planned though 2014. While this segment has been mostly incurring losses of late, DBRS notes that the losses have been narrowing, with GME generating a small profit in Q2 2011. However, ongoing economic headwinds in Europe could considerably delay the timeframe by which this segment begins to generate material profitability.

GM’s International Operations (GMIO) segment accounts for the highest number of unit sales within the Company. This segment is predominantly represented by China, where the Company is involved in several joint ventures. While considerably lower than that of GMNA, GMIO nonetheless generates significant profitability (including the equity income of GM’s joint venture partners). DBRS notes, however, that earnings through the first half of 2011 trended lower year-over-year, given moderating (albeit still high) growth rates and cost increases related to engineering and raw materials. Nonetheless, this segment is expected to gain increasing prominence within the Company as emerging markets are projected to represent the predominant source of future growth for the global automotive industry. In Q4 2010 the Company added a new geographic segment – GM South America, with Brazil being the most important market (this segment was previously incorporated in GMIO). While profitable, this new segment’s earnings remain modest in proportion to the total Automotive business, with margins in 2011 also being adversely affected by cost increases and an aging product portfolio. DBRS notes that GM intends to launch 40 new models in the region by the end of 2012.

DBRS notes that the Company’s financial profile, which benefitted substantially through the bankruptcy of General Motors Corporation, is very solid, with GM’s credit metrics readily exceeding those commensurate with the current ratings. Given its solid cash generation and healthy liquidity, the Company continued to make significant paydowns of its debt in 2010, which in aggregate totalled $10.9 billion (on a net basis). GM’s balance sheet strength is partly offset by its sizeable underfunded pension plans. However, DBRS notes that the Company has been aggressively addressing its U.S. pensions. GM made a voluntary $4.0 billion cash contribution in Q4 2010, followed by a further contribution of $2.2 billion (in the form of stock) in the first quarter of this year, with the Company publicly indicating its objective to fully fund its pension plan.

DBRS notes that GM remains very well positioned to benefit from the ongoing recovery of the automotive industry, with its strong presence in emerging markets further bolstering growth prospects over the long term. However, DBRS also observes that persistent economic uncertainties in the United States and particularly in Europe could yet derail the recovery in these developed markets (and potentially trigger another downturn). The Stable trend on the ratings reflects the above-cited headwinds facing the Company. However, in the event that DBRS’s concerns regarding market conditions moderates or should GM’s performance momentum persist notwithstanding these challenges (with the Company demonstrating further progress regarding the restructuring of its European operations), the ratings could be subject to further positive action.

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

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