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

DBRS has today upgraded the Issuer Rating of General Motors Company and General Motors Holdings LLC (collectively, GM or the Company) to BBB (low) from BB (high). The ratings upgrade reflects the Company’s sound business profile as one of the world’s largest automotive original equipment manufacturers (OEMs), with impressive geographic diversification. Moreover, DBRS notes that GM’s financial profile is robust, benefiting from a very strong balance sheet (with very low gross debt levels) and solid earnings performance over the past two and a half years. While DBRS recognizes that the Company is currently facing significant headwinds in certain regions, notably Europe, this is expected to be largely offset by ongoing solid performance across other end markets. As a result of GM’s Issuer Rating attaining investment-grade status, there is no recovery analysis performed with respect to the Company’s Secured Credit Facility, and the previously assigned recovery rating has been withdrawn. Furthermore, given the investment-grade Issuer Rating, the rating of the Secured Credit Facility (notwithstanding collateral provided in support thereof) remains consistent with the Issuer Rating and has therefore been confirmed at BBB (low). The trend on all ratings is Stable. With these rating actions, GM has been removed from Under Review with Positive Implications, where it was placed on May 4, 2012.

The upgrade of the Issuer Rating reflects the Company’s continuously solid performance, with GM becoming significantly profitable from 2010 through the first half of 2012. The Company’s progress in its core North American market has been impressive amid industry conditions that, while improving, remain below historical norms. The strong results of GM’s North American operations (GMNA) 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 are attaining higher pricing and segment share vis-à-vis their predecessors.

DBRS notes that the Company is taking steps to further diversify its product line. Examples include the recent/forthcoming introductions of the Chevrolet Malibu and Spark, which should combine to significantly enhance GM’s profile across the small and medium car segments. Next year, the Company is planning several further product launches, including models derived from its next-generation pick-up and SUV platform, which should further bolster the segment’s already-solid profit margins.

While GM’s recent product momentum is noteworthy, DBRS notes that the profitability of GMNA also significantly reflects the now-favourable cost position of this segment, with break-even production levels estimated at industry volumes of approximately ten million units (based on current market share). DBRS projects that U.S. industry sales in 2012 will range between 14.0 million and 14.5 million units, which, while higher year-over-year, remains below historical norms. Further moderate growth is projected in 2013 and thereafter. However, in the event that this growth is derailed by ongoing economic headwinds, DBRS notes that GMNA could absorb a meaningful contraction in U.S. industry volumes and still be materially profitable.

The Company‘s geographic diversification is enhanced by its significant International Operations (GMIO) segment, which 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. Although its profits are considerably lower than GMNA’s, GMIO nonetheless generates significant profitability (including the equity income of GM’s joint venture partners), with year-over-year earnings essentially flat and volume and pricing gains offset by higher manufacturing and material costs associated with new product programs. Going forward, 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. Performance of GM’s South American segment (GMSA) in 2011 through the first half of 2012 has been lacklustre, however, reflecting a relatively aged product line, as well as increases in material and production costs. Earnings this year have also been undermined by foreign exchange losses as a result of changing government policies that have affected trade patterns as well as access to foreign currency.

GM’s biggest challenge, however, lies with respect to its European segment (GME), which has consistently incurred losses since the Company’s inception (post-bankruptcy of the former General Motors Corporation). The European automotive industry has long been burdened by overcapacity that has been worsened by the significant economic headwinds attributable to the region’s sovereign debt crisis. The Company continues to undertake restructuring activities in Europe. Following the prior closure of its assembly facility in Antwerp, Belgium, GM recently announced the planned closure of its assembly facility in Bochum, Germany; however, this is not expected until mid-2016 to allow for the expiry of existing product commitments. Further recent developments include agreed-upon wage freezes at the Company’s Ellesmere Port facility in the United Kingdom, as well as production stoppages/work hour reductions at the Kaiserslautern and Rüsselsheim plants in Germany. GM is also in the midst of a significant product offensive in Europe that aims to bolster the Company’s regional revenues. While DBRS views the above-cited incremental measures favourably, additional substantive measures are required for this segment to materially narrow its losses going forward and approach profitability.

GM’s financial profile is, however, very strong. The Company’s Automotive operations, as of June 30, 2012, had a substantial net cash position (i.e., in excess of industrial indebtedness) of $27 billion, with income and cash flow-based metrics readily exceeding those commensurate with the current ratings. While the Company’s balance sheet (among other items) initially benefited substantially through the bankruptcy of General Motors Corporation, DBRS observes that GM has proved successful in upholding its balance sheet (and even strengthening it considerably further). DBRS also notes that the Company is in the midst of de-risking its U.S. salaried pension plans through retiree lump sum payments supplemented by a transfer of the majority of remaining pension obligations to a third-party insurance company. To complete this transfer, the Company expects to contribute between $3.5 billion and $4.5 billion to the salaried plan this year. While DBRS views these steps favourably, U.S. hourly pension plan obligations (not covered by the above actions) remain substantial, although the Company does not anticipate any required contributions over the next few years.

DBRS notes that the Company is currently in ongoing labour negotiations with the Canadian Auto Workers (CAW) union, with the current contract expiring on September 17, 2012. DBRS notes that autoworkers represent only a small proportion of the CAW’s total constituency and expects the discussions to be challenging, with the possibility of an eventual strike not unlikely. However, DBRS does not anticipate that such events would have a material adverse impact on GM as only a few models are produced at the Company’s sole remaining CAW-affiliated assembly plant in Oshawa, Ontario.

DBRS believes that GM remains very well positioned to benefit from the ongoing recovery of the automotive industry, with its strong presence in emerging markets, especially China, further bolstering growth prospects over the long term. However, DBRS also observes that persistent challenges, most notably in Europe and (to a much lesser degree) South America, continue to burden the Company, with the Stable trend on the ratings reflecting these headwinds. While the North American economy also faces certain headwinds, DBRS notes that the rate of recovery of the automotive industry in the United States has significantly exceeded that of the overall economy. Moreover, in the event that automotive volumes in the United States undergo a sharp downturn (which we consider unlikely), DBRS notes that GMNA would still likely be significantly profitable given its favourable cost structure, with expected ongoing solid earnings from GMIO further bolstering the Company’s performance. Conversely, in the event that GM demonstrates significant progress in turning around its European operations (i.e., substantial narrowed losses with the prospect of future profitability), this could result in positive implications for the rating.

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

The applicable methodology is Rating Companies in the Automotive Industry (April 2011), which can be found on our website under Methodologies.