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

DBRS Limited (DBRS) has today upgraded the long-term debt ratings of General Motors Company (GM or the Company) to BBB from BBB (low). The trend on all ratings is Stable. In its press release dated October 9, 2015, DBRS had indicated that GM’s ratings would likely be subject to an upgrade in line with ongoing progress in the Company’s international operations amid consistently solid (and also improving) results in its core North American market.

GM’s 2015 financial results were improved over already solid 2014 earnings (excluding charges associated with the Company’s ignition switch vehicle recalls), with positive volume, mix and pricing effects representing contributing factors. Margins of GM North America were very solid at a level of 10.3%. Moreover, losses of GM Europe meaningfully narrowed. GM International Operations generated strong operating earnings of $1.4 billion (including equity income from the Company’s Chinese joint ventures of $2.1 billion) despite meaningful headwinds in Asia Pacific, excluding China, with growth in China itself also moderating markedly last year. While losses of GM South America increased vis-à-vis 2014 levels, DBRS notes that this substantially reflects prevailing political and economic headwinds, with the results of all original equipment manufacturers (OEMs) active in the region being accordingly adversely affected.

DBRS expects the results of GM’s collective international operations to continue trending positively. In Europe, earnings are likely to be bolstered by ongoing cost reduction activities and by the full year availability of the recently launched Opel Corsa and Astra models, which combined represent roughly half of the Company’s European sales volumes. In China, notwithstanding the moderation in industry growth, the Company is also expected to generate solid sales and profitability given a strong product cadence that includes forthcoming model launches in the key CUV/SUV segments; GM is also looking to benefit from purchase tax reduction incentives (applicable to vehicles with engines no larger than 1.6 litres in displacement) in effect through the end of this year. Moreover, in Asia Pacific, excluding China, notwithstanding macroeconomic headwinds, the Company estimates that its 2016 earnings performance will likely remain relatively flat vis-à-vis prior year levels in line with ongoing product portfolio improvements and cost efficiencies. The above-cited gains should readily more than offset ongoing losses in South America that are nonetheless projected to narrow year over year in 2016.

DBRS recognizes that, notwithstanding the above-cited improvements, North America continues to represent the significant majority of GM’s automotive profit. However, while regional automotive growth is expected to meaningfully moderate over the near to medium term, underlying economic and industry factors continue to suggest that aggregate volumes in North America are likely to remain at very healthy levels. Moreover, the precipitous decline in oil and fuel prices has resulted in a meaningful migration away from cars and toward light trucks (including CUVs/SUVs), with such vehicles representing 57% of total U.S. industry volumes in 2015 compared with 50% in 2013. DBRS notes that this is particularly advantageous for an OEM such as GM, which is very well represented in the light-truck segment, where contribution margins are also considerably stronger compared with the car segments. However, despite the ongoing tailwinds in North America, DBRS also notes that the Company’s regional cost structure continues to be very favourable, with GM maintaining a U.S. breakeven point in the range of 10.0 million to 11.0 million industry units subsequent to the ratification of the new collective bargaining agreement with the United Auto Workers Union last year, a figure substantially below the 2015 US SAAR of 17.5 million units.

While the Company continues to face forthcoming federal ignition-switch litigation (with five additional “bellwether trials” scheduled through the remainder of this year), DBRS notes that, given the September 2015 settlement with the United States Department of Justice, most issues associated with GM’s extensive ignition switch vehicle recalls have been significantly resolved, with the residual exposure in the form of the forthcoming federal litigation considered by DBRS to be quite manageable.

As has been the case for several years, GM’s financial profile remains very solid (effectively exceeding levels commensurate with the assigned ratings), with the automotive operations having a net cash position $11.5 billion as of December 31, 2015, and concurrent available liquidity of $32.5 billion. While dividends and share repurchases have increased sharply in recent years (with the Company having announced the intention to repurchase an additional $5.5 billion of shares through year-end 2017), DBRS notes that such outlays are readily enabled by GM’s sizable liquidity and consistent cash flow generation.

The Company’s solid financial profile amid anticipated ongoing strong earnings in North America render a downgrade somewhat improbable. Conversely, future positive rating actions would likely be predicated upon additional gains in GM’s international operations such that they would represent a meaningful proportion of total automotive profit, although the sizable headwinds in various emerging markets (that are currently expected to persist in the immediate term) serve to undermine the Company’s ongoing efforts.

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.

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

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