DBRS Confirms General Motors Company at BBB (low), Trend Stable

DBRS has today confirmed the Issuer Rating of General Motors Company and the Issuer Rating and Secured Credit Facility rating of General Motors Holdings LLC (collectively, GM or the Company) at BBB (low). The ratings reflect 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 three 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. The trend on all ratings is Stable.

The ratings incorporate the Company’s continuously solid performance in its core North American market, in line with higher volumes and firmer pricing that are not only a function of improving industry conditions but are also reflective of GM’s success in introducing new vehicle models, most of which are being well received in the marketplace and are attaining higher pricing and segment share vis-à-vis their predecessors. Recent model introductions include the key launch of the Chevrolet Silverado/GMC Sierra pick-up trucks. Chevrolet’s next generation Corvette was also recently unveiled to very enthusiastic reviews by the collective automotive press. Moreover, the Company fared very well in J.D. Power’s latest Initial Quality Study (IQS) survey (issued in June 2013), with GMC and Chevrolet achieving the highest rankings among mass-market brands. DBRS also notes that GM has been quite successful in diversifying its product portfolio, with the Company now enjoying significant representation in the passenger car segments in addition to its historically strong position in larger vehicle segments. Similarly, DBRS notes that higher-end brands such as Buick and Cadillac are achieving meaningful growth through new model introductions in previously unoccupied vehicle segments.

While the recent product momentum is significant, DBRS notes that the profitability of GMNA also largely reflects the now-favourable cost position of this segment, with break-even production estimated at industry volumes significantly below actual levels (based on current market share). DBRS projects that U.S. industry sales will reach approximately 15.5 million units this year, with volumes in 2014 likely reverting to levels above 16 million units. 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 (including the equity income of GM’s joint-venture partners) nonetheless generates significant profitability, although year-over-year earnings through June 30, 2013, were somewhat weaker as a result of some softening in volumes, product mix and pricing. Going forward, while the growth of the regional industry is likely to moderate relative to recent high levels, DBRS nonetheless expects consistent high single-digit (in percentage terms) growth in China, with this segment 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 America (GMSA) segment rebounded somewhat in 2012, reverting to profitability (after having incurred losses the previous year) as the Company introduced several new models in the region. Earnings through the first half of this year have, however, 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. GM continues to undertake restructuring activities in Europe, with, in effect, an entirely new senior management team put in place last year. The Company recently announced that the planned closure of its assembly facility in Bochum, Germany, will now take place at the end of 2014, significantly earlier than the previously targeted mid-2016 time frame. Moreover, GM signed revised labour agreements in Germany and Spain that serve to control cost increases at its facilities in those countries over the next several years. The Company is also in the midst of a significant product offensive in Europe that aims to bolster regional revenues. DBRS views the above-cited incremental measures favourably and also notes that the European automotive industry will likely bottom out this year. That being said, DBRS expects the recovery in the region to prove very protracted, thereby rendering GM’s target of achieving break-even profitability in the region by the 2015/2016 time frame somewhat challenging. The Company’s efforts in Europe also include its alliance with PSA Peugeot Citroën (Peugeot), which is still in its formative stages, with both companies not expecting to derive substantial benefits until 2016. GM and PSA are both targeting annual synergies of approximately $1 billion from that point going forward.

The Company’s automotive operations, as of June 30, 2013, had a substantial net cash position (i.e., in excess of industrial indebtedness) of $20 billion. While DBRS acknowledges that this cash position is materially weaker than the $27 billion net cash position as of Q2 2012, DBRS notes that this primarily reflects several strategic initiatives that the Company has implemented over the past 12 months. Firstly, in Q4 2012, GM purchased 200 million of its common shares from the U.S. Treasury (UST) for total proceeds of $5.5 billion (the UST expects to fully divest its GM ownership position within the first quarter of 2014; similarly, the Canadian federal and Ontario governments recently sold 30 million GM shares for total proceeds of $1.1 billion). Secondly, GM also made payments totalling $1.4 billion to redeem the outstanding preferred shares of GM Korea. Consistent with the Company’s objective to progressively de-risk its pension plans, GM also paid $2.3 billion to defease approximately $28 billion of its pension obligations. Finally, in the second quarter of this year, GM’s automotive operations made a capital contribution of $1.3 billion to its financial services segment, GM Financial, in support of the latter’s acquisition of the international operations of Ally Financial Inc. (Ally).

Notwithstanding the above-cited uses of cash, GM’s financial profile is strong, 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). DBRS believes that GM remains very well positioned to benefit from the ongoing growth of the global automotive industry, with its strong presence in emerging markets, especially China, further bolstering 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 DBRS considers 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., substantially narrowed losses with the prospect of future profitability), this could result in positive implications for the ratings.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Automotive Manufacturing Industry (August 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.