CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of General Motors Company (GM) and its General Motors Holdings LLC (GM Holdings) subsidiary at 'BB+'. Fitch has also upgraded the IDR of General Motors Financial Company, Inc. (GMF), GM's captive finance subsidiary, to 'BB+' from 'BB'. Fitch has revised the Rating Outlooks for GM and GM Holdings to Positive from Stable. GMF's ratings have been removed from Rating Watch Positive and revised to Rating Outlook Positive. In addition, Fitch has affirmed GM Holdings' secured revolving credit facility rating at 'BBB-' and GM's Series B preferred stock rating at 'BB-'. GMF's senior unsecured rating has been upgraded to 'BB+' from 'BB'. In addition, Fitch has upgraded the long-term IDR and affirmed the short-term IDR of GMAC Bank GmbH and affirmed the short-term IDR of GMAC (UK) Plc. following GMF's purchase of the entities during its acquisition of Ally Financial Inc.'s (Ally) international operations (IO). A full list of the rating actions is included at the end of this release.
KEY RATING DRIVERS
GM's ratings are supported by the auto manufacturer's very low automotive leverage, strong liquidity position, continued positive free cash flow generating capability (excluding voluntary pension contributions), reduced pension obligations, and improved product portfolio. Importantly, since exiting bankruptcy four years ago, GM has kept its automotive debt level low while maintaining a high level of cash and credit facility availability, providing it with meaningful financial flexibility. GM's ratings are further supported by its position as one of the most geographically diverse global automakers, with a strong market presence in key developing markets, such as China, Southeast Asia and Latin America.
The Positive Outlook on GM and GM Holdings reflects Fitch's expectation that a continued improvement in the company's operational performance, an increase in the profitability of its North American operations, a strengthening of its global product portfolio, and a stabilization in its European business could lead to an upgrade within the next 24 months. A further reduction in the company's substantial pension obligations would also support a positive rating action, as would a further increase in both market share and net pricing in its key global markets.
Despite its strengthened financial position, GM still faces a number of challenges. The company continues to work on the restructuring of its global operations that it began after exiting its 2009 bankruptcy, and profitability, although much improved over the past four years, has yet to attain the levels of its strongest competitors. Over the longer term, GM's focus on improving the efficiency of its business, including manufacturing operations, product development, information technology and business services, should yield meaningful improvements in profitability. However, in the near term, this restructuring risks temporarily adding incremental cost and complexity to the business. Other challenges include turning around the company's loss-making operations in Europe, reducing the size of its significant pension liabilities, and meeting the requirements of tightening global emissions, fuel economy and safety regulations.
GM's cash position (including cash equivalents and marketable securities) declined over the past year as the company used approximately $5.5 billion to repurchase a portion of the U.S. Treasury's equity stake and another $2.3 billion in connection with transferring its U.S. salaried pension plan to a group annuity contract. The company also used $1.4 billion to redeem GM Korea's outstanding preferred shares and made a $1.3 billion equity injection into GMF to help fund the financial subsidiary's acquisition of certain non-U.S. operations of Ally Financial. Despite this cash usage, GM's cash position remained relatively strong at $24 billion as of June 30, 2013. Total liquidity, including $10.6 billion in availability on the company's primary revolvers, totaled $35 billion.
Free cash flow (calculated by Fitch as automotive cash from operations less capital expenditures and preferred dividends) was a use of $193 million in the 12 months ended June 30, 2013, largely as a result of the aforementioned pension actions. For the full year 2013, Fitch expects free cash flow to be positive, despite capital spending running near the 2012 level of $8 billion. Over the next few years, Fitch expects GM's free cash flow to grow, even as the company's focus on investing in new products keeps capital spending elevated by historical standards.
GM's profitability, though much improved in the post-recession period, remains lower than many of its primary competitors. Fitch's calculated EBITDA margin was only 6.1% in the first half of 2013, and the free cash flow margin was 0.9%. Although both figures reflect higher structural costs tied to new product roll-outs, as well as losses in Europe, they nonetheless are lower than the margins of many of GM's competitors in the same period. In North America, GM's EBIT-adjusted margin (based on the company's figures), a proxy for its operating margin, was 7.3% in the first half of 2013, also on the lower end of the industry. Fitch expects GM's margins, both in North America and globally, will improve as it continues to focus on improving operational efficiency, as well as reducing losses in Europe. A sustained increase in margins relative to the company's competitors would be a factor for a potential future upgrade.
GM's low automotive leverage remains a key driver of the company's ratings and outlook. As of June 30, 2013, leverage (automotive debt/Fitch-calculated EBITDA) was only 0.5x, and FFO adjusted leverage was only 1x. GM ended the second quarter with $4 billion in automotive debt, primarily comprised of various bank borrowings, private note placements and capital leases. The majority of GM's consolidated automotive debt is outside the U.S. and non-recourse to the parent company. GM's low leverage is an important contributor to the company's financial flexibility.
As noted, the significant restructuring needed to end years of losses in Europe remains a challenge for GM. However, the company appears to have gained traction over the past year in its efforts to increase profitability in the region. In April 2013, the company announced that its Bochum, Germany, plant will close in late 2014 after workers rejected an agreement that would have kept the plant open until 2016. Closing Bochum earlier than planned will allow GM to realize the benefits sooner, although it will require some incremental spending to move production of the Opel Zafira from Bochum to Ruesselsheim, Germany. GM's alliance with PSA Peugeot Citroen continues to move forward, with the companies still targeting annual benefits of about $1 billion each once the alliance is fully underway, most likely after 2016.
China remains a key element of GM's long-term growth strategy and a meaningful source of cash for the company. Including joint venture sales, China is GM's largest market by unit volume, and the company is the largest auto manufacturer in the Chinese market. GM receives between $1 billion and $2 billion in cash dividends from its Chinese joint ventures annually. Although Chinese industry growth has slowed from the very high pace seen several years ago, secular growth is expected to continue driving industry sales higher over the long term, and GM remains well positioned to take advantage of these trends. GM's Shanghai GM joint venture recently began construction of a $1.3 billion Cadillac plant in the country, further demonstrating the importance of the market the company's long-term strategy.
As of year-end 2012, GM's global pension plans (including certain unfunded non-U.S. plans) were underfunded by $28 billion, with about half of that in the U.S. Despite transferring most of its U.S. salaried pension obligations to a group annuity in 2012, the funded status of GM's U.S. plans improved by only $188 million versus year end 2011. The relatively minor improvement in the funded status was due to a decline in the discount rate used to measure the remaining plans' projected benefit obligations. For the U.S. plans, the company used a discount rate of 3.59% versus 4.15% in 2011, and for the non-U.S. plans, the discount rate declined to 3.7% in 2012 from 4.5% in 2011. However, Fitch expects the recent rise in long-term interest rates, if they hold through year end, will drive a significant improvement in the funded status of the plans when they are re-measured at the-end of 2013.
The equalization of GMF's ratings with those of its parent, GM, reflects Fitch's view that GMF is a 'core' subsidiary to its parent. This is based on actual and potential support provided to GMF from GM, as well as the increased amount of GMF revenue that comes from GM following the close of the majority of the acquisition of Ally's IO. GM agreed to inject $2 billion of cash into GMF, of which $1.3 billion has already been provided, in order to ensure an appropriate pro forma capital structure following the close of the IO acquisition. In addition, GM increased its inter-company credit facility to $1.5 billion from $300 million to ensure adequate funding for the IO acquisition, then, subsequent to the May 2013 senior unsecured note issuance, the line was reduced to $600 million in June 2013. GM also made GMF a co-borrower on its bank facility and increased and extended the tax sharing agreement between the two entities.
The ratings of GMF also reflect its established market position in the auto finance space, seasoned management team, strong asset quality, enhanced liquidity profile, demonstrated funding flexibility and favorable leverage relative to other rated captive finance companies. GMF's asset quality continues to be strong, but credit performance is expected to begin to normalize during 2013 due to normalizing credit performance, weaker seasonal trends in the second half of 2013, and an overall shift in the portfolio vintage. This decline will be partially offset by the increase in prime receivables from the IO acquisition, which will result in an overall improved credit profile.
GMF's liquidity profile was enhanced by the upsizing of two of its North American warehouse facilities, the increase of its inter-company credit facility with GM, the establishment of a North American floor plan facility during the first half of 2013 and the acquisition of international facilities through the IO purchase. Total liquidity at June 30, 2013, was $4.1 billion compared to $2.9 billion at year-end 2012, growing commensurately with increased organic growth, the IO acquisition and debt issuance. GMF has accessed the unsecured markets twice since June 30, 2012, issuing $3.5 billion in senior unsecured notes. Fitch believes the company's access to the public unsecured market affords it greater funding flexibility and expects unsecured debt as a percentage of total debt will increase going forward.
GMF's leverage, as measured by debt to tangible equity was 4.8x at June 30, 2013, compared to 3.3x at Dec. 31, 2012, and 3.0x a year earlier as an increase in debt outstanding was partially offset by a growing equity base, given solid profitability trends. GMF has historically targeted a long-term leverage ratio, as measured by earning assets to tangible net worth, of 6.0x to 8.0x. While the company has historically operated well below its target, Fitch expects GMF to operate within its targeted range following the close of the IO acquisition. Fitch is comfortable with the increase in leverage given the improvement in asset quality as a result of the shift in portfolio mix.
GM Holdings' senior secured revolving credit facility is rated 'BBB-', one notch 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. According to Fitch's notching criteria, 'BBB-' is the highest rating possible for a security of an issuer with an IDR of 'BB+'. GM's Series B preferred stock rating of 'BB-' is two notches below GM's IDR of 'BB+', reflecting its relatively low priority position in a distressed scenario.
The Positive Outlook suggests that Fitch could upgrade GM's ratings within the next 24 months if current trends in the company's operating profile continue as expected. Specifically, Fitch will look for the company to increase its margin performance on a sustained basis, particularly in the key North American market. This will likely require the company to continue increasing pricing and reducing operating costs while holding market share steady. Fitch will also look for the company to further stabilize the financial performance of its European operations. A further improvement in the funded status of the company's pension plans would also contribute to an upgrade.
Fitch notes that a future assignment of an investment-grade IDR to GM and its subsidiaries will require further conviction on the agency's part that the company's operating and financial profiles are sufficiently robust to withstand the numerous secular and cyclical pressures present within the global auto industry. Fitch's ratings are based on an issuer's expected performance through the economic cycle, so an assignment of investment-grade ratings to GM would be based upon Fitch's expectation that the company's liquidity profile, cost structure and free cash flow generating potential are sufficient to sustain an investment-grade credit profile even in a period of severe economic stress.
Although the Positive Outlook suggests a negative rating action is not expected within the next 24 months, Fitch could consider a negative action on an unexpected material decline in GM's financial or operational performance. A significant downturn that drives GM's total liquidity below $25 billion for an extended period or a poor market reception to the company's new vehicles could lead to a negative rating action. Likewise, a significant increase in the company's long-term automotive debt, could also lead to a negative rating action.
GMF's Positive Outlook is linked to that of its parent. However, a negative rating action could be driven by a change in the perceived relationship between the parent and subsidiary, such as if Fitch believed that GMF had become less core to the parent's strategic operations or adequate financial support was not provided in a time of crisis. Additionally, the recognition of consistent operating losses, a material increase in leverage, and/or deterioration in the company's liquidity profile could also yield negative rating action.
Positive rating momentum at GMF will be limited by Fitch's view of GM's credit profile. Fitch cannot envision a scenario where the captive would be rated higher than its parent.
Fitch has taken the following rating actions:
--Long-term IDR affirmed at 'BB+';
--Preferred stock rating affirmed at 'BB-';
--Outlook revised to Positive from Stable.
--Long-term IDR affirmed at 'BB+';
--Secured revolving credit facility affirmed at 'BBB-';
--Outlook revised to Positive from Stable.
--Long-term IDR upgraded to 'BB+' from 'BB';
--Short-term IDR assigned at 'B';
--Senior unsecured rating upgraded to 'BB+' from 'BB';
--Ratings removed from Rating Watch Positive;
GMAC Bank GmbH
--Long-term IDR upgraded to 'BB+' from 'BB-';
--Senior unsecured upgraded to 'BB+' to 'BB-';
--Short-term IDR affirmed at 'B';
--Commercial paper affirmed at 'B';
GMAC (UK) Plc
--Short-term IDR affirmed at 'B';
--Short-term debt affirmed at 'B'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage (Aug. 5, 2013);
--Evaluating Corporate Governance (Dec. 12, 2012);
--Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (Nov. 13, 2012);
--Global Financial Institutions Rating Criteria (Aug. 15, 2012);
--Finance and Leasing Companies Criteria (Dec. 11. 2012);
--Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012);
--Captive Finance Companies - 2012 Comparative Analysis (May 20, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Evaluating Corporate Governance
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
Rating FI Subsidiaries and Holding Companies
Captive Finance Companies