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 trend on all ratings is Stable. 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.

DBRS recognizes that the Company is currently facing headwinds across various regions. These include Europe, where GM is involved in ongoing efforts to right size its production capacity, with the continent seemingly on track for a recovery that is nonetheless likely to prove modest and very protracted. The Company is also facing challenges in South America amid economic and trade policies that have been very volatile of late. However, perhaps most significantly, GM is currently facing difficulties in its native North American market linked with numerous recall campaigns initially commencing with a recall to repair/replace potentially faulty ignition switches. Through the first quarter of 2014, the number of vehicles subject to recalls totalled approximately seven million units, with associated charges substantially undermining the Company’s earnings performance in that period. DBRS notes, however, that GM’s financial profile is sufficiently strong to readily absorb associated charges incurred thus far without being materially adversely impacted. While there are also several litigation claims pertaining primarily to wrongful death as well as economic losses associated with the recalled vehicles, DBRS notes that the significant majority of such claims remain outstanding and, furthermore, could extend some years, rendering it extremely difficult to currently provide a meaningful estimate of the potential costs to the Company. There is also uncertainty as to what proportion of legal claims would ultimately fall to the “new” GM or the former General Motors Corporation that went into bankruptcy in June 2009. Finally, it also remains too early to judiciously assess the potential impact of the recalls on GM’s sales and earnings performance going forward.

GM’s financial results in 2013 were solid and represented four consecutive years of firm profit generation, with total earnings before interest and tax (EBIT) of the automotive operations (as reported by GM) amounting to $7.7 billion. The Company made ongoing progress in its core North American market (that continues to represent the significant majority of profit), with the GM North America (GMNA) segment generating an EBIT of $7.5 billion, thus representing a margin of 8%, which ranks quite favourably within the automotive industry. In Europe, despite ongoing difficult industry conditions, GM Europe (GME) managed to meaningfully narrow its losses, primarily through achieved cost reductions as the Company continues to target break-even performance in the continent by the 2015-2016 timeframe. Results of GM South America (GMSA) were moderately weaker year over year, although this was mostly a function of headwinds associated with changing trade and economic policies that have impacted the region’s automotive industry as a whole and, as such, are not wholly reflective of specific company performance. With respect to GM’s International Operations segment (GMIO), financial results through the past five quarters have been somewhat uneven, although this primarily pertains to the consolidated operations and reflects, among other items, implemented restructuring measures in connection with the exit of the Chevrolet brand from Europe (incorporated in GMIO’s results) as well as the planned termination of vehicle and engine manufacturing in Australia by year-end 2017. However, DBRS notes that China represents the significant majority of this segment’s unit sales; moreover, the Chinese joint ventures (JVs) have continued to perform well, with sales/market share performance in addition to equity income remaining at solid levels.

For 2014, GM, absent the effects of the current recall campaign, projects that its earnings performance will remain solid, with EBIT margins forecast to remain roughly in line with prior-year levels. While the Company had anticipated incurring restructuring costs in its GME and (to a lesser extent) GMIO segments, these were expected to be essentially offset by GM’s ongoing progress in North America and China.

However, the Company’s Q1 2014 results were significantly adversely impacted by the recalls that totalled approximately seven million units in the three-month period, with the recalls in connection with ignition switches and ignition lock cylinders totalling 2.6 million units. As a result of these ignition switch-related recalls, GM’s senior management conducted a further review that resulted in the announcement of the following additional recalls: approximately 1.9 million vehicles to repair power steering and associated components; approximately 1.3 million vehicles to address the potential non-deployment of side impact restraints; and approximately 1.2 million vehicles for other matters. As a result of the above, GM incurred associated charges of roughly $1.3 billion in Q1 2014. DBRS notes that absent the recall-related charges, the Company’s Q1 consolidated EBIT was essentially constant with solid prior-year levels. (Subsequent to Q1 2014, GM today announced further recalls covering approximately 2.7 million vehicles, with the largest recall involving potential tail lamp malfunctions of various models produced from 2004 to 2012. As a result of these latest recalls, the Company indicated that it expects to incur a charge of $200 million in the second quarter of this year.)

With respect to various legal proceedings against the Company in connection with the above-cited events, in addition to future fines possibly levied by government authorities, it remains too early to reasonably estimate any aggregate amount of potential outlays that could face the Company. Moreover, there is also uncertainty as to what proportion of such outlays would ultimately fall to the “new” GM that emerged subsequent to the June 2009 bankruptcy of the former General Motors Corporation (the significant majority of recall-impacted vehicles having been manufactured prior to 2009). DBRS notes, however, that GM’s financial position is strong, with credit metrics generally exceeding levels commensurate with the current ratings. Moreover, the Company’s balance sheet and liquidity position are particularly robust. As of March 31, 2014, GM’s automotive operations had a net cash position of $19.8 billion; as of the same date, the liquidity position (consisting of cash balances and available committed credit lines) totalled a substantial $37.4 billion.

Furthermore, as is the case with potential financial outlays facing the Company, any likely long-term impact on GM in terms of sales and market share performance resulting from the recent vehicle recalls cannot be reliably assessed at this time. Through the first quarter of 2014, GM’s market share in the United States moderately declined to 17.0% from a level of 17.7% over the similar prior-year period. However, the Company’s share in the month of April improved to 18.3%, essentially constant year over year. Moreover, DBRS notes that GM’s momentum in terms of its current products is quite positive, with the Company’s recent model introductions typically achieving higher transaction prices relative to their predecessors, with brands such as Chevrolet, Buick and Cadillac also improving in their respective rankings across various industry surveys.

The assigned ratings and Stable trend incorporate the Company’s satisfactory business profile (absent potential impacts from the vehicle recalls), with GM’s geographic and product diversification being sound (albeit the Company currently remains somewhat too dependent on North America for earnings generation). As previously noted, GM’s financial profile is solid, with the industrial operations maintaining a strong balance sheet and substantial liquidity position. However, DBRS notes that any developments that could materially adversely impact either the Company’s financial profile as a result of legal claims/imposed fines or, alternatively, GM’s likely sales prospects going forward in line with damages incurred to its reputation as a function of the recalls, could trigger an event-driven review of 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, which can be found on our website under Methodologies.

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