DBRS Places General Motors Company Under Review with Positive Implications

DBRS has today placed the Issuer Rating of General Motors Company and General Motors Holdings LLC (collectively, GM or the Company) as well as GM’s Secured Credit Facility (and all recovery ratings) Under Review with Positive Implications. The ratings action reflects DBRS’s more positive fundamental assessment of the North American automotive market, which has thus far in 2012 generated significantly higher sales levels than our previous expectations. DBRS also notes that North America continues to account for the significant majority of automotive earnings. This has enabled the Company to remain solidly profitable, with the Company’s recently announced first quarter 2012 earnings improving year over year (after adjusting for special items) even amid mixed results across its international operations. GM has accordingly demonstrated substantial progress in generating consistently solid operating performance and continuously improving its financial profile; DBRS notes that the Company’s credit metrics well exceed levels commensurate with the current ratings. Moreover, notwithstanding ongoing headwinds in certain foreign markets, most notably Europe, DBRS expects GM to generate profitability for the foreseeable future, providing further support for likely positive rating actions.

After several consecutive years of industry volumes substantially below secular trend levels, DBRS notes that U.S. automotive sales have picked up notably through early 2012. The reasons for the sales uptick are numerous and include (among other factors): a progressively improving (if still somewhat fragile) macroeconomic environment; significant pent-up vehicle demand (given a record average age of the U.S. vehicle fleet); and firm used car values that have prompted many consumers to trade in their vehicles for newer models (for further details, please refer to DBRS's commentary dated April 4, 2012). Accordingly, DBRS has revised its expectations, with U.S. light vehicle volumes projected to be in the range of 14 million to 14.5 million units this year and progressively reverting to secular trend levels within the next couple of years.

GM continues to deliver very strong results in its core U.S. market. In 2011 and the first quarter of 2012, GM’s operating margins for its North American Automotive operations amounted to 8.0% and 7.0%, respectively, both of which are solid levels for the sector. With GM’s operations being restructured to achieve break-even results even at low industry volumes, the Company is generating substantial profitability in the region in line with increasing industry volumes, bolstered by significantly firmer pricing as a result of consistently solid recent product launches. Moreover, DBRS notes that GM’s product portfolio is considerably more balanced than in the past, with the Company now well positioned in the compact and mid-sized car segments, which are representing a higher proportion of industry sales in response to ever-increasing fuel prices.

DBRS notes that GM’s very solid performance in North America effectively more than offsets mixed results across the Company’s international operations. Of these, Europe is likely the most concerning with regional volumes forecast to contract materially this year (notwithstanding some significant variances between countries) as a result of strong economic headwinds associated with the sovereign debt crises of certain member nations. This is exacerbated by persistent overcapacity issues in the continent. While the Company is currently assessing its options with respect to the restructuring of its operations in Europe, DBRS notes that GM has managed to somewhat contain its losses, which amounted to $800 million and $300 million in 2011 and Q1 2012, respectively. DBRS notes that these are readily exceeded by profits generated in North America, which, as discussed previously, are projected to remain robust.

Moreover, significant profitability is also generated by GM’s International Operations (GMIO), with China accounting for more than 75% of the segment’s 2011 volumes. Through 2011 and Q1 2012, GMIO generated pre-tax income of $1.9 billion and $0.5 billion, respectively (equity income from GM’s Chinese joint-venture partners represent the significant majority of earnings). DBRS notes that GM is among the market leaders in China, which is already the world’s largest automotive market and (notwithstanding some recent moderation) is expected to continue generating significant growth for the foreseeable future.

DBRS also notes that the Company’s balance sheet is exceedingly strong. As of March 31, 2012, cash and marketable securities totaled $31.6 billion while automotive indebtedness as of the same date amounted to $5.4 billion. GM’s very low leverage affords the Company substantial flexibility to withstand any shocks or downturns to its business.

GM nonetheless has some specific challenges, including lackluster performance in South America where earnings have been undermined by GM’s relatively aged product line amid burgeoning industry capacity as result of significant investments by new market entrants. Pre-tax earnings through the past fifteen months are essentially at breakeven levels, although the Company hopes to revert to profitability in this region by the end of this year as GM continues with its planned product offensive. The Company is also placing added emphasis on its Cadillac brand through the forthcoming launches of the XTS and ATS, the latter taking particular aim at BMW’s very well entrenched 3 Series.

However, these challenges remain more than offset by GM’s substantial progress in its core North American operations, which are expected to generate ongoing solid profitability. DBRS expects the Under Review with Positive Implications status to be resolved within the next two to three months.

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

The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.