DBRS Morningstar Changes Trend on General Motors Company to Positive from Negative, Confirms at BBB

DBRS Limited (DBRS Morningstar) changed the trends on General Motor Company’s (GM or the Company) Issuer Rating and Revolving Credit Facility to Positive from Negative and confirmed both ratings at BBB. Concurrently, DBRS Morningstar changed the trends on the Long-Term Issuer Rating and the Long-Term Senior Debt rating of General Motors Financial Company, Inc. (GM Financial) to Positive from Negative while confirming those ratings at BBB. Regarding short-term ratings, DBRS Morningstar changed the trend on GM Financial’s Short-Term Issuer Rating and Short-Term Instruments rating to Positive from Negative while confirming those ratings at R-2 (middle). Finally, DBRS Morningstar changed the trend on the Senior Unsecured Notes rating of General Motors Financial of Canada, Ltd. to Positive from Negative while confirming the rating at BBB.

These rating actions reflect GM’s sound business risk assessment as a major global automotive original equipment manufacturer with a strong core franchise in full-size sport utility vehicles (SUVs) and pickup trucks. Additionally, the Company’s operating performance, both last year in response to the global progression of the Coronavirus Disease (COVID-19) and this year amid the global semiconductor shortage, is proving quite resilient, with GM’s financial risk assessment remaining strong in the context of the currently assigned ratings.

Despite the challenges associated with the coronavirus pandemic, the Company’s 2020 profitability (adjusted EBIT) improved year over year (YOY), although 2019 results were adversely affected by the United Auto Workers’ strike in Q4 of that year. While wholesale volumes decreased because of production interruptions related to the pandemic, this was more than offset by positive factors, including substantial pricing gains that resulted from the successful launches of GM’s new full-size SUVs as well as low industry inventory levels (in line with the above-cited production challenges). Costs were also favourable YOY, reflecting austerity and cost-saving measures implemented in response to the pandemic in addition to ongoing structural cost reductions. Finally, product mix was also positive YOY, given the launch of the new SUV models and planned production reductions of car models. In 2021, the Company adopted various countermeasures in response to the global semiconductor shortage, notably prioritizing the production of higher-margin models to help support earnings. While the semiconductor shortage will persist through Q2, GM has guided toward H1 2021 adjusted EBIT in the $8.5 billion to $9.5 billion range. The Company expects H2 2021 will continue to be complex and fluid. GM plans to provide additional updates on its outlook for H2 2021 upon releasing its Q2 earnings results. DBRS Morningstar notes that, absent the semiconductor shortage, global automotive industry conditions are quite favourable, with strong demand and very firm pricing levels, notwithstanding increasing material and commodity costs.

DBRS Morningstar observes that the Company is actively embracing the electrification of its product portfolio in addition to new mobility business initiatives, both of which (while remaining modest in the context of the current automotive industry) would appear to offer substantial long-term growth potential. Accordingly, GM has announced plans to invest up to $35 billion (recently increased from $27 billion) in electric vehicles and autonomous vehicles through 2025. Despite the sizable scale of such investments, DBRS Morningstar notes that these can be absorbed by the strong earnings and cash flow generation of the Company’s core SUV and truck franchise, bolstered by the relative growth of its higher margin adjacencies businesses (notably, GM Financial and aftersales activities).
Consistent with the Positive trend assigned to the ratings, an ongoing solid operating performance of GM (essentially in line with its 2021 outlook) over the near term would likely result in an upgrade of the ratings. Conversely, significantly weaker earnings amid ongoing high investments—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications, although DBRS Morningstar deems such a scenario rather unlikely.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 22, 2020; https://www.dbrsmorningstar.com/research/368670), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577