Fitch Upgrades General Motors' IDR to 'BB'; Outlook to Positive

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of General Motors Company (GM), General Motors Holdings LLC (GM Holdings) and General Motors Financial Company, Inc. (GMF) to 'BB' from 'BB-'. The Rating Outlook for GM, GM Holdings and GMF is being revised to Positive from Stable. A complete list of ratings actions can be found at the end of this release.

The upgrade of GM's ratings reflects the strengthening of the company's credit profile over the past year as global light-vehicle production volume has grown, net pricing has improved and additional cost efficiencies have taken hold. In addition, with a relatively low debt load and a very strong liquidity position, GM has significant financial flexibility that will help it manage through a potential deterioration in global auto market conditions. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. It also could use a portion of its liquidity to further shore up the underfunded position of its defined benefit (DB) pension plans. The new labor agreement with the United Auto Workers (UAW) appears largely to have maintained GM's financial and operational flexibility.

Despite the continued improvements to the company's credit profile, a number of meaningful risks remain. GM has more work to do on increasing the efficiency of its operations to the level of its strongest global competitors. It will also need to continue making meaningful discretionary cash contributions to its DB pension plans to meet its objective of fully funding the plans. This contribution could be increased as a result of the decline in both interest rates and asset values experienced by the capital markets over the past several months. In addition, broader industry risks have not abated, including the likelihood of rising gasoline prices over time, volatile raw material costs, worldwide manufacturing overcapacity, aggressive competition and tightening global fuel economy and emission regulations. Meeting these challenges will require ongoing significant cash investments in both products and operations.

The ratings for GMF are linked to GM, reflecting Fitch's belief that the company is of strategic importance to its parent and that there is an implicit level of support between the entities. GMF was acquired to help improve GM's penetration rates in subprime retail, full-spectrum leasing, and eventually, wholesale financing. Still, GMF's ratings also reflect its solid market position in the auto finance space, seasoned management team, strong asset quality, improved funding flexibility, sound capitalization, and its ability to manage liquidity and economically access the ABS markets throughout the economic downturn.

The Positive Outlook for all three entities reflects Fitch's expectation that GM's credit profile will improve gradually over the next several years, provided automotive market conditions do not materially weaken. Fitch anticipates leverage will decline modestly and free cash flow will strengthen, both due to a continuation of the same factors that have contributed to the marked improvement seen over the past two years. Fitch notes, however, that with balance sheet debt likely to decline only slightly over the intermediate term, leverage reduction will be largely dependent upon increased EBITDA. Positive free cash flow will allow the company to maintain a strong automotive cash liquidity position, although the current level is well above the $20 billion that Fitch believes is the minimum needed for GM to operate its business. Given the excess automotive cash on GM's balance sheet, Fitch believes management could make additional, and potentially large, voluntary pension contributions later this year, further reducing the plans' underfunded position. Fitch does not expect the company to return cash to shareholders through common dividends or share buybacks until it has made further progress on funding its pension plans.

Fitch could consider a positive action on GM's ratings in the intermediate term if the company makes further progress on reducing its substantial pension obligations, while continuing to update its product portfolio and increase the cost efficiency of its operations. A continued ability to maintain or increase both market share and net pricing in the company's key global markets would also be a factor in a positive rating action. Importantly, Fitch also would look for the company to maintain a cash, cash equivalents, and marketable securities balance of about $20 billion or higher on a sustained basis.

On the other hand, Fitch could undertake a negative rating action on GM if external market conditions weaken significantly, resulting in a reduction in free cash flow, a decline in liquidity and an increase in leverage. This situation would require a significant reversal of current market trends. Fitch could also take a negative rating action on the company if management changes its philosophy about keeping debt low and de-risking the company's DB pension plans.

While GMF's current Rating Outlook is linked to GM, a de-linking of the financial subsidiary's ratings or Outlook from those of the parent company could occur with a change in the perceived relationship between GM and the subsidiary. This could result in a negative rating action on GMF if Fitch believes that the unit has become less core to the parent's strategic operations or adequate financial support is not provided in a time of crisis. Additionally, the recognition of consistent operating losses, an increase in leverage beyond historical levels, and/or deterioration in the company's liquidity profile could yield negative rating action.

Despite the significant positive change seen in GM's credit profile since its bankruptcy filing two years ago, many risks remain. Company-specific risks include significant pension and other post employment benefit (OPEB) obligations, although the latter was reduced heavily in 2009 with the transfer of obligations tied to UAW-represented employees to a union-sponsored voluntary employee benefits association (VEBA). OPEB also is likely to decline once the company and the Canadian Auto Workers Union are able to set up the anticipated Health Care Trust, which will be similar to the VEBA. As of year-end 2010, GM's global pension plans (including certain unfunded non-U.S. plans) were underfunded by $22 billion, including a $12 billion underfunded position for the U.S. plans. During 2010, the company contributed $4.9 billion to its global plans, including $4.1 billion to its U.S. plans. Notably, the figures above do not include a common stock contribution made to the U.S. plans in January 2011 that was valued at $2.2 billion. GM is not required to make any contributions to its U.S. plans in 2011, although management has indicated that the company could potentially make additional contributions to the plans later this year, depending on actual and projected plan performance. This could result in some tension with the equity investors, however, as the company's balance sheet focus appears more oriented to the benefit of fixed income investors, at least in the near term.

The underfunded position of the global pension plans could rise significantly at the next measurement date of Dec. 31, 2011, if long-term interest rates stay near current levels and asset values remain depressed. Demonstrating the sensitivity of the plans to interest rates and asset values, Fitch estimates that, for illustrative purposes only, a 30-basis point (bp) decline in interest rates, combined with a 10% decline in asset values (both compared to year-end 2010 levels), would increase the underfunded status of GM's global pension plans by about $13 billion versus year-end 2010. This would result in a global underfunded position, including certain unfunded plans, of $35 billion. Although a reduction in interest rates and asset values of this magnitude would significantly increase the level of cash contributions needed to fully fund the plans, GM's substantial excess cash liquidity position would provide it with the means to offset much of the decline. Fitch emphasizes that the above calculation is only to frame a scenario and is not meant to be an estimate of GM's current funded status.

Also considered in Fitch's ratings of GM is the heightened uncertainty as to the strength and pace of the global economic recovery. Although Fitch's base case forecast assumes the U.S. economic recovery continues for the next several years, the rate of improvement is expected to be slower than earlier estimates, as continued high unemployment, ongoing housing weakness, reduced consumer confidence and volatile stock prices are likely to constrain the rate of growth through at least the near term. Conditions in the highly fragmented Western European auto market also are uncertain, as concerns regarding the fiscal stability of the Euro zone countries could weigh heavily on auto demand in the region. Access to customer financing could become an issue in Europe as well, given GM customers' reliance on bank financing, which could become constrained as Euro zone fiscal pressures increase. Developing countries are also seeing a slowing in the pace of demand growth, with, for example, government efforts to curtail the pace of new car sales in China resulting in slower demand growth in a key country.

Fitch's 2011 industry forecast calls for full-year U.S. auto sales of 12.5 million, which represents about an 8% increase from the 11.6 million sales seen in 2010. Although the U.S. seasonally adjusted annual rate (SAAR) of sales appears to have hit the 13 million level in September, Fitch believes maintaining that level through the remainder of the year will require heavy marketplace incentives, driven, in part, by Japanese manufacturers making up for market share shortfalls experienced following the earthquake and tsunami earlier this year. This could depress the strong industry net pricing that was seen through the summer of 2011. Assuming the U.S. does not fall back into recession, Fitch expects U.S. sales to continue rising in 2012 and beyond, although sales growth is likely to be milder in those years than earlier expectations due to the current projections for a slower rate of improvement.

GM's product portfolio in the U.S. performed relatively well through the first eight months of 2011, with its U.S. light vehicle sales up 16%, leading to a 100 bp increase in market share to 20.1% from 19.1%. GM has seen particular strength in sales of the new Chevrolet Cruze, as well as the Chevrolet Equinox, Cadillac CTS and Buick Regal. In addition, sales of its large pickups, the Chevrolet Silverado and GMC Sierra, generally have held up despite higher fuel prices and significant competition from Ford's new V6-powered F-150 variants. Through August, Silverado sales were up 7.3% and Sierra sales were up 18% year over year. A continued rollout of new models should further strengthen GM's U.S. lineup, with upcoming vehicles such as the compact Chevrolet Sonic, Buick Verano small sedan and redesigned Chevrolet Malibu further updating the company's product offerings.

Outside the U.S., GM's unit sales have grown this year despite pressure on industry demand in key markets, such as China and Western Europe. Through the first half of 2011, unit sales in the company's European segment increased 8.7%, despite the ongoing malaise in the region's auto market, supported by several new Opel models, including the redesigned Meriva and Astra. In the South America segment, unit sales were up 20% in the first half of the year (1H'11) on improving economic conditions in much of the region, while the International Operations segment experienced an 8.9% increase in unit sales (including joint venture sales) in 1H'11, driven by growth in developing markets. Overall, GM's global unit sales were up 11% in 1H'11, more than twice the 5.1% increase seen in global industry sales during the same period, further demonstrating the progress the company is making in growing its substantial presence in virtually all major global markets.

Strong net pricing and a lower cost base contributed to a Fitch-calculated automotive EBITDA margin of 8.4% in the last 12 months (LTM) ended June 30, 2011, up from only 4.3% in the LTM ended June 30, 2010. Despite the relatively strong EBITDA margin, free cash flow in the LTM ended June 30, 2011 was negative $898 million, largely due to $4 billion of discretionary pension contributions made in late 2010 and the negative working capital impact of 1Q'11 termination of an in-transit financing program with Ally Financial. Absent these non-recurring items, Fitch estimates free cash flow would have been positive in the LTM ended June 30, 2011. Over the intermediate term, Fitch expects margins to rise somewhat from current levels and remain strong by historical standards. However, maintaining sustained margins above 10% could be challenging, given the heavy competition of the global auto market, which continues to be characterized by a focus on market share.

For the full year 2011, Fitch expects GM to produce positive free cash flow, excluding any additional significant pension contributions that the company might voluntarily make late in the year. Negatively affecting free cash flow in 2H'11 will be an expected steep rise in capital spending, which the company estimates will total about $7 billion for the full year. After spending only $2.5 billion in 1H'11, GM's forecast suggests 2H'11 capital expenditures could be about $2 billion higher than spending in 1H'11. Also likely contributing free cash flow pressure will be typical seasonal factors, such as plant shutdowns for the model year changeover and higher structural costs to support new model rollouts. Longer term, the company expects to keep capital expenditures near current levels, regardless of changes in market demand. Although this will put additional pressure on free cash flow during times of market weakness, consistent capital spending will help to ensure that the company keeps its product lineup fresh and competitive.

GM exited bankruptcy in 2009 with a dramatically reduced debt load, and over the course of 2010, the company reduced its debt by a further $11 billion, ending the year with $4.6 billion of automotive debt. As of June 30, 2011, automotive debt totaled $4.7 billion, and Fitch expects the company's automotive debt to remain in the $4 billion to $5 billion range over at least the intermediate term. The majority of GM's automotive debt is associated with non-U.S. subsidiaries and is non-recourse to the parent company. Late last year, GM withdrew its application for loans from the U.S. Department of Energy's (DOE) Advanced Technology Vehicle Manufacturing (ATVM) program, which at the time had not yet been approved, as management believed borrowing from the program would have been inconsistent with its plans to minimize debt. With GM's very substantial cash liquidity balance, and with management's continued plan to operate the company with minimal debt, Fitch does not expect debt to rise meaningfully for at least the next several years.

Fitch calculates that GM ended 2Q'11 with EBITDA leverage (total debt/ Fitch-calculated EBITDA) of 0.4 times (x), the same as at year-end 2010 and down from 1.5x at June 30, 2010. Fixed charge coverage (Fitch-calculated EBITDAR/gross interest expense plus rent) was 9.0x at June 30, 2011, up from 7.3x at year-end 2010 and 2.2x at the end of 2Q'10. The company ended 2Q'11 with a very strong unrestricted automotive cash, cash equivalents and marketable securities balance of $33 billion, up from $27 billion at year-end 2010, and total liquidity, which includes the $5 billion of availability on the company's primary revolving credit facility, increased to $38 billion versus $32 billion. The company also had availability on a number of committed and uncommitted lines of credit outside the U.S. Liquidity in the LTM ended June 30, 2011, was bolstered by GM's sales of its interest in Delphi for $3.8 billion and its preferred stock in Ally Financial for $1 billion earlier this year, as well as its sale of Nexteer for $426 million late last year.

On Sept. 28, 2011, the UAW announced that its members had ratified the new four-year labor agreement reached between GM and union leadership 12 days earlier. Fitch has reviewed the terms of the new agreement and the implications on GM's financial performance over the next several years. In general, the new agreement appears to provide the company with sufficient financial and operational flexibility to allow a continuation of the positive progress it has made since emerging from bankruptcy in 2009. Unlike earlier UAW agreements, the new agreement has not increased pension benefits for union-represented employees, and, importantly, it has capped the employee population covered by the DB plans, with new-hire employees covered by a defined contribution (DC) plan instead. Average compensation will decline over time as workers earning entry-level wages make up an increasing proportion of the employee population, and a greater percentage of compensation will be tied the company's financial and quality performance. Although the agreement brings some vehicle production that had been slated for Mexico back to the U.S., it appears overall that it has met management's objective of maintaining the company's breakeven level at a U.S. light-vehicle SAAR of about 10.5 million.

GM Holdings' senior secured revolving credit facility is rated 'BBB-', two notches above the subsidiary's IDR of 'BB' to reflect the substantial collateral coverage backing the facility, including most of the company's hard assets in the U.S. GM's Series B preferred stock rating of 'B+' is rated two notches below GM's IDR of 'BB', reflecting its relatively low priority position in a distressed scenario.

GM's ratings apply to 100 million shares of 4.75% Series B mandatory convertible junior preferred stock. GM Holdings' ratings apply to a $5 billion secured revolving credit facility. GMF's ratings apply to $500 million of unsecured debt.

Fitch has upgraded the following ratings, all with a Positive Outlook:

GM

--IDR to 'BB' from 'BB-';

--Preferred stock rating to 'B+' from 'B-'.

GM Holdings

--IDR to 'BB' from 'BB-';

--Secured revolving credit facility rating to 'BBB-' from 'BB+'.

GMF

IDR to 'BB' from 'BB-';

Senior unsecured rating to 'BB' from 'BB-'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--Corporate Rating Methodology (Aug. 12, 2011);

--Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (May 12, 2011);

--Evaluating Corporate Governance (Dec. 16, 2010);

--Global Financial Institutions Rating Criteria (Aug. 16, 2011);

--Rating Linkages in Parent and Nonbank Financial Subsidiary Relationships (Nov, 29, 2010);

--Finance and Leasing Companies Criteria (Dec. 13, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Rating Linkages in Nonbank Financial Subsidiary Relationships

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=577325

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=587245

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
GM and GM Holdings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Inc., 70 West Madison Street, Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
John C. Culver, CFA
Senior Director
+1-312-368-3216
or
GMF
Primary Analyst
Katherine Hughes
Associate Director
+1-312-368-3123
or
Secondary Analyst
Meghan Neenan
Senior Director
+1-212-908-9121
or
Committee Chairperson
Ed Thompson
Senior Director
+1-212-908-0364
or
Media Relations
Brian Bertsch
+1-212-908-0549
brian.bertsch@fitchratings.com

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