DBRS Confirms General Motors Company at BBB, Stable, Following Sale of Euro Operations to PSA Peugeot

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Revolving Credit Facility rating of General Motors Company (GM or the Company) at BBB with Stable trends following the Company’s recent announcement that it reached an agreement with PSA Peugeot Citroȅn (PSA) regarding the sale of GM’s Opel/Vauxhall subsidiary and of General Motors Financial Company, Inc.’s (GM Financial) European operations (together with Opel/Vauxhall, the Sale). The respective transaction amounts are EUR 1.3 billion and EUR 0.9 billion, with the Sale remaining subject to various regulatory approvals (although the transaction involving Opel/Vauxhall is anticipated to likely close before YE2017). The rating confirmations incorporates DBRS’s evaluation that GM’s business risk assessment will not fundamentally change as a function of the Sale, notwithstanding a meaningful decrease in geographic diversification. Moreover, the Company’s financial risk profile remains strong with credit metrics persisting at levels above the currently assigned ratings.

Regarding additional details of the Sale, GM is to receive a total consideration of EUR 1.3 billion for its Opel/Vauxhall subsidiary which consists of EUR 0.67 billion in cash and an additional EUR 0.65 billion in warrants (pending shareholder approval) that will be exercisable from the fifth anniversary date of issuance with a maturity of nine years. With respect to the sale of GM Financial’s European operations, GM Financial is to receive cash consideration in the amount of EUR 0.9 billion, roughly equivalent to 0.8 times its book value. DBRS further notes that GM retained the majority of pension and retiree obligations, apart from the German Actives plan and various other small plans. Such plans will be transferred to PSA and GM will pay PSA approximately EUR 3.0 billion for the full settlement thereof. Finally, in connection with the Sale, the Company announced that it will incur a primarily non-cash associated charge in the range of $4.0 billion to $4.5 billion.

DBRS notes that the Sale is consistent with GM’s prior decisions to effectively exit market regions (i.e., Russia and Australia) where the Company’s financial performance had been lackluster over an extended period with the prospects of a meaningful turnaround in the intermediate term appearing to be rather unlikely. Moreover, GM added that additional headwinds facing Europe in the form of increasing environmental regulations (i.e., tightening CO2 emissions requirements) and uncertainties associated with the BREXIT vote represented additional considerations regarding the Sale.

Furthermore, DBRS notes that the costs associated with the retention of the significant majority of Opel/Vauxhall’s pension obligations remain well absorbed by the Company’s strong financial risk profile. As of December 31, 2016, GM’s automotive operations had a net cash position of $10.8 billion with total available liquidity as of the same date amounting to $35.6 billion. Moreover, as a result of the Sale and its removal of the Company’s European operations, which had been incurring associated losses and cash burn, GM indicated that its targeted minimum cash balance of the automotive operations would be reduced to $18.0 billion from the prior level of $20.0 billion.

The Stable trend on the ratings incorporates DBRS’s expectation that GM’s financial performance, despite some forthcoming costs associated with investments in new businesses and technologies, will persist at solid levels amid industry conditions that remain rather reasonable, notwithstanding uncertainties associated with potential trade policy changes in its core North American market. Moreover, the Company’s future earnings stand to be further bolstered by its (1) ongoing cost-reduction activities as GM recently increased its five-year target through 2018 to a cumulative amount of $6.5 billion and (2) forthcoming product launches that are to be relatively over-weighted in the very popular and significantly profitable crossover utility vehicle (CUV) segments.

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 principal methodologies are Rating Companies in the Automotive Manufacturing Industry and Global Methodology for Rating Finance Companies, which can be found on dbrs.com under Methodologies.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.