General Motors Acceptance Corporation: New Issue

Kam Hon, David Schroeder / 416-593-5577 ext.2243, ext.2232 / khon@dbrs.com

 

DBRS is assigning a rating of A (low) to the long-term debt issue and the convertible debenture issue of General Motors Corporation (“GM” or the “Company”) and a rating of A (low) to the long-term debt issue of General Motor Acceptance Corporation (“GMAC”), all with a Stable trend.  GM announced today that it plans to offer approximately $10 billion in debt securities and convertible debentures.  GM currently expects that substantially all of the proceeds will be used over time to partially fund GM’s U.S. pension funds and other retiree benefit obligations.  GM expects to make significant cash contributions to these funds by late 2003.  In addition, GMAC will seek to raise approximately $3 billion, as part of its ongoing funding plan for 2003, for general corporate purposes. 

 

Any usage of the proceeds from these issuances by GM to fund its U.S. pension plans and retiree benefit obligations will lead to a deterioration of GM’s net liquidity position by the same amount.  However, DBRS expects the resultant higher leverage to be temporary.  Previously, GM has intended to fund these periodic pension contribution requirements with cash flow from operations.  Now, DBRS expects that GM will use the internally generated cash flow to restore its balance sheet.  In addition, raising term debt to accelerate funding of the U.S. pension plans has effectively termed out these payments in the next few years, and adds to the Company’s financial flexibility.  Furthermore, DBRS expects the earnings impact of the higher debt level not to be material over time as lower pension expense resulted from higher returns on a higher pension asset base to partially offset the increase in interest expense.

 

GM’s profitability is expected to remain under pressure.  Ongoing structural factors affecting GM are as follows: (1) Eroding market share despite higher sales incentives;  (2) increasing competition from both foreign and domestic rivals in the more profitable pick-up truck and SUV segments;  (3) a restrictive union contract impeding the Company’s efforts to deal with the ongoing excess capacity issue   (the current contract expires in September 2003, and the upcoming contract negotiation could help resolve this issue);  (4) unprofitable European and South American operations; and  (5) large underfunded position in its pension and post-retirement benefits obligations, although the planned contribution to the U.S. pension plans will substantially improve the funded status of these plans.  Moreover, market conditions in North America and Europe are expected to deteriorate further in the near term with softening demand and a continuing rise in sales incentives.  Nevertheless, GM’s ratings are still well supported by the following factors. (1) The Company has a leading position in the global automotive industry.  GM’s size and critical mass create economies of scale and efficiencies. (2) The balance sheet remains above average despite the higher debt levels, giving it financial flexibility to weather a downturn in the auto industry. (3) Highly profitable captive finance operations in GMAC help stabilize earnings.  The current rating assumes a satisfactory outcome from the upcoming UAW contract negotiations with minimal disruption to GM’s operations.