DBRS Changes Trend on General Motors Company to Positive from Stable, Confirms Ratings at BBB

DBRS Limited (DBRS) changed the trend on the Issuer Rating and Revolving Credit Facility rating of General Motors Company (GM or the Company) to Positive from Stable, and confirmed both ratings at BBB. The Company’s sound business risk assessment (BRA) as a major global automotive original equipment manufacturer (OEM) with solid market positions in North America and China (readily the world’s largest single automotive market) supports the ratings. The trend change recognizes that the Company’s financial risk assessment (FRA) exceeds the currently assigned ratings and DBRS’s expectation that future earnings performance and associated credit metrics will continue to approximate recent levels, notwithstanding headwinds in the form of required investments associated with emerging automotive technologies and businesses, in addition to trade/tariff uncertainties.

GM’s 2017 earnings were solid and essentially constant with record 2016 levels. Contributing factors to the positive results included ongoing cost reductions (which readily absorbed raw materials cost headwinds), firmer product mix and favourable pricing. These positive factors were partly offset by lower volumes (significantly, a function of the Company’s lower car segment sales in North America and reduced daily rental volumes). In North America, which represents the substantial majority of GM’s automotive profit, earnings were particularly favourable as the Company’s regional EBIT-adjusted margin increased to a record level of 10.7%. Moreover, 2017 represented the third consecutive year in which General Motors North America (GMNA) generated EBIT-adjusted margins above 10% (very solid for the automotive industry), with the Company establishing itself as the most profitable of the Detroit Three in its domestic core market. In other regions, GM’s performance in China (results accounted for under the equity method) also remained solid, with 2017 equity income amounting to $2 billion, readily more than offsetting EBIT-adjusted losses of $700 million incurred across other markets in the GM International (GMI) segment.

DBRS notes that, as a result of the Company’s 2017 sale of its European operations to Peugeot SA (PSA) (the PSA Sale) and the exit/reduced presence across various other regions, GM is less geographically diverse and thus has become more dependent on North America for earnings. However, DBRS also notes that GM’s cost structure across its remaining markets has been reduced as a consequence of these actions. Thus, the Company’s BRA has remained essentially constant.

DBRS acknowledges that GM’s FRA at year-end 2017 is slightly weaker year over year (YOY). However, this is due to the additional debt incurred from the Company’s August 2017 senior unsecured notes issuance of $3 billion, the proceeds of which were used to repay amounts drawn on the Company’s revolving credit facility to fund payments to PSA for assumed net underfunded pension liabilities in connection with the PSA Sale. While the higher resulting debt levels have moderately softened GM’s credit metrics (for clarification purposes, DBRS does not typically include unfunded pension liabilities in its debt metrics, because point-in-time assessments of such liabilities can be volatile as underlying actuarial and economic factors change), DBRS notes that the Company’s FRA remains at levels above the currently assigned ratings. As of December 31, 2017, GM’s automotive operations had a sizeable net cash position of $6.1 billion as well as substantial liquidity (consisting of cash/marketable securities and available committed credit lines) of $33.6 billion.

While the Company faces material investments associated with emerging automotive technologies (electric vehicles/autonomous driving) and businesses (ride sharing/fleet management), DBRS estimates that these can be readily funded from GM’s projected cash flow generation and available liquidity. Similarly, GM also faces uncertainties with respect to potential tariffs to be imposed on steel and aluminum, although DBRS notes that the Company has publicly indicated that it purchases over 90% of its steel for U.S. production from U.S.-sourced suppliers, with GM further adding that any increase in U.S.-sourced steel prices will likely prove not material, as the majority of the Company’s contracts are longer-term. With respect to trade uncertainties, primarily concerning the renegotiation of the North American Free Trade Agreement (NAFTA), recent indications suggest that the United States may soften its stance on U.S. auto content thresholds. However, even in the event that a revised NAFTA deal results in materially increased U.S. and North American vehicle content requirements, DBRS estimates that the higher resulting costs would nonetheless prove manageable. Finally, regarding a potential trade conflict between the United States and China, DBRS notes that the majority of vehicles sold by GM in China are locally produced, with imports significantly consisting of premium/luxury vehicles (where price inelasticity is higher, albeit moderating). As such, any restrictions/increased tariffs imposed by China (on vehicles produced outside of China) are not expected to result in significantly weaker earnings performance of GM’s Chinese operations.

The Positive trend reflects DBRS’s opinion that GM’s solid financial performance, notwithstanding the above-cited headwinds, will likely persist going forward in line with continuing favourable conditions in its key markets (despite a slight projected decline in U.S. industry volumes, albeit from record 2016 levels, and moderating growth in China). Moreover, the Company is expected to benefit from its strong portfolio cadence (recent product introductions being relatively over-weighted in the crossover utility vehicle segment) with upcoming launches over the near-term being concentrated in the high-margin truck and sport-utility vehicle segments. Assuming the Company’s operating performance remains on track, DBRS would anticipate upgrading the ratings within the forthcoming 12-month period. Conversely, if GM’s free cash flow turns negative as a result of deteriorating automotive conditions amid ongoing substantial research and development and capex programs, the trend on the ratings could revert to Stable.

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 methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.