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

DBRS Limited (DBRS) upgraded the Issuer Rating and Revolving Credit Facility rating of General Motors Company (GM or the Company) to BBB (high) from BBB. Concurrently, DBRS also upgraded the Long-Term Issuer Rating and the Long-Term Senior Debt rating of General Motors Financial Company, Inc. (GM Financial) to BBB (high) from BBB and GM Financial’s Short-Term Issuer Rating and Short-Term Instruments to R-2 (high) from R-2 (middle). Additionally, DBRS upgraded the rating of the Senior Unsecured Notes issued by General Motors Financial of Canada, Ltd. to BBB (high) from BBB. The trends on all ratings have been changed to Stable from Positive. The rating upgrades reflect the Company’s ongoing solid financial risk assessment (FRA) as GM’s credit metrics, notwithstanding a moderation in year-over-year (YOY) earnings performance, persist at levels above the previously assigned ratings. The Company’s business risk assessment (BRA) also remains sound, with GM very well established as a major global automotive original equipment manufacturer (OEM) with solid market positions in North America and China. Moreover, DBRS estimates that cost headwinds facing the industry are likely to be considerably mitigated by GM’s ongoing efficiency initiatives, which should further support profitability going forward.

The Company’s 2018 earnings were moderately softer YOY, incorporating commodity cost headwinds (in addition to higher content cost of new models), adverse foreign exchange developments (primarily from South America) and lower volumes that partly reflect planned production downtimes in support of the Company’s new pickup truck launches. The decline in profit notwithstanding, DBRS notes that GM’s operating performance continues to be favourable, with the Company generating the highest margins of the Detroit Three in its core North American market and with earnings in China (results accounted for under the equity method) proving relatively resilient given that nation’s first annual sales decline in 28 years (reflecting consumer uncertainty amid ongoing trade/tariff concerns).

DBRS acknowledges that GM, as with all OEMs, faces cost headwinds associated with various emerging automotive technologies, including increasing active safety requirements and the development of alternative powertrains (to meet tightening emissions regulations across most jurisdictions). The Company is also making significant investments into its transportation-as-a-service initiatives (with GM Cruise being established as a new reporting segment responsible for the development and commercialization of autonomous vehicle technology in 2018). However, such outlays remain well absorbed by GM’s strong financial profile and cash flow generation. Moreover, DBRS notes that GM Cruise has been subject to meaningful validation from third parties, with the segment thus far garnering approximately $5 billion in outside investment commitments (such investments serving to alleviate any erosion of the Company’s automotive liquidity to further fund GM Cruise).

DBRS notes that global industry volumes are estimated to persist at reasonable levels for the foreseeable future. However, recognizing slowing growth prospects in its core U.S. and Chinese markets and the ongoing shift toward pickup trucks and utility vehicles (at the expense of the car segments), in November 2018, GM announced various transformation activities (the Transformation) aimed at increasing its operating efficiency going forward. Key outcomes of the Transformation include higher capacity utilization rates (primarily) in North America, with targeted reductions in manufacturing complexity and associated efficiencies in purchasing projected to result in annual run rate reductions in fixed costs and capex of $4.5 billion and $1.5 billion, respectively, by year-end 2020. DBRS views the Transformation positively from a credit perspective as it should help to significantly offset the above-mentioned cost headwinds facing the automotive industry.

DBRS expects the Company’s ratings to remain constant over the near to medium term, as GM’s solid FRA provides some cushion to absorb a moderate decline in earnings. However, further positive actions are also somewhat unlikely, with the ratings being somewhat underpinned by GM’s existing BRA.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

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

The ratings of General Motors Financial Company, Inc. are no longer endorsed by DBRS Ratings Limited for use in the European Union. (For clarification purposes, the ratings of General Motors Company were previously unendorsed by DBRS Ratings Limited for use in the European Union on August 1, 2018.)

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.

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