CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB-' to General Motors Company's (GM) proposed issuance of $2 billion in senior unsecured notes. The Issuer Default Rating (IDR) for GM is 'BBB-' and its Rating Outlook is Stable.
A full list of the ratings of GM and its subsidiaries is included at the end of this release.
The proposed notes will be issued in two series: approximately $1 billion due in 2036 and approximately $1 billion due 2046. The notes will be issued under a supplement to the indenture that also covers the company's existing $7 billion in senior unsecured notes issued in 2013 and 2014. GM intends to use proceeds from the proposed notes to fund a discretionary contribution to its U.S. defined-benefit pension plan, with any remaining proceeds used for general corporate purposes. Although the proposed notes will result in a slight increase in leverage, Fitch expects leverage will remain low for GM's rating category over the intermediate term.
GM's planned discretionary contribution to its U.S. pension plan is consistent with its intention to continue improving the funded status of its U.S. pension while also de-risking it. On a projected benefit obligation basis, GM's U.S. pension plan was underfunded by $10.4 billion at year-end 2015, with an 85.4% funded status.
KEY RATING DRIVERS
GM's ratings reflect the fundamental improvement in the company's core business over the past several years. In addition, the ratings recognize progress the company has made in resolving many of the lawsuits and other claims that arose in the wake of its ignition switch recalls in 2014. Fitch believes the company has sufficient financial flexibility to manage the remaining outstanding recall-related issues while maintaining its investment-grade credit profile. Although GM's plans to deploy virtually all of its post-dividend free cash flow (FCF; as calculated by Fitch) toward share repurchases is a concern, we are comfortable that the company is committed to its minimum cash liquidity target of $20 billion, a level that should allow the company to withstand a severe economic downturn.
Following the proposed notes issuance, GM's leverage will remain low for its rating category, and the company will continue to be in a strong net cash position. Fitch expects that FCF could be pressured somewhat in the near term by lingering recall-related cash expenses, but over the longer term, we expect FCF to grow on improved product profitability and further operational efficiencies. GM continues to be one of the most globally diversified auto manufacturers, with a strong position in most major and emerging auto markets, which helps to shield it from region-specific economic weakness. Its global diversification could also provide opportunities to continue growing its sales volumes in the event the U.S. auto market reaches a sales plateau in the next two years.
GM's profitability continues to improve, and the company reached its 2016 North American EBIT-adjusted target of 10% (as calculated by the company) one year ahead of plan, recording a NA EBIT-adjusted margin of 10.3% in 2015. North American profitability in 2015 was supported by strong sales of high-margin full-size pickups and SUVs, as well as improved margins on several recently redesigned passenger cars. Fitch expects GM to once again record a NA EBIT-adjusted margin in the 10% range in 2016 as low gasoline prices continue to support sales of light trucks and as several additional redesigned passenger cars enter the market, including the Chevrolet Cruze and Malibu. Outside North America, Fitch expects sales in China and Western Europe will remain positive in 2016, but sales in South America, Russia and parts of the ASEAN region are likely to remain weak for a prolonged period.
Fitch's calculated automotive EBITDA in 2015 was $13.1 billion, leading to an EBITDA margin of 9.0%. Pro forma for the proposed issuance, GM's automotive debt would have been $11.3 billion and automotive EBITDA leverage would have been 0.9x at year-end 2015. Fitch expects leverage to remain below 1x over the intermediate term and to slowly decline primarily as a result of increased EBITDA on further profit growth.
GM had $20.3 billion in automotive cash, cash equivalents and marketable securities at year-end 2015, leading to a pro forma net cash position of $9 billion, including the proposed notes. In addition to its cash and cash equivalents, GM had $12.2 billion available on its credit facilities at year-end 2015, leading to a pro forma net automotive liquidity position of $21.2 billion. GM produced breakeven automotive FCF (after dividends) in 2015, but Fitch expects the company to produce positive automotive FCF in 2016, with an FCF margin in the 1% to 3% range (excluding the $2 billion discretionary pension contribution), on further improvement in the company's global profitability and a decline in recall-related cash expenses.
Over the next decade, the global auto industry is likely to experience significant change from emerging vehicle technologies and new transportation business models. Among the traditional auto manufacturers, GM has been one of the more active companies working on ways to remain relevant in this evolving transportation environment. Its existing OnStar business has provided it with a platform for enhanced in-vehicle communications, while it works on new technologies such as vehicle-to-vehicle communications and automated driving capabilities. GM's recent $500 million investment in Lyft, as well as partnerships with several car-sharing ventures, will also provide it with exposure to transportation models beyond traditional auto manufacturing and sales. Fitch expects GM will continue to increase its investment in emerging technologies and business models over the next several years as it looks to position itself as both an auto manufacturer and a mobility company.
KEY ASSUMPTIONS
--Global light vehicle sales rise in the low-single-digit range annually over the next several years.
--GM's revenue rises over the intermediate term on a combination of global industry growth and modest price increases, while its global market share remains near the current level.
--Profitability increases over the intermediate term as GM's global production volumes rise, the company makes further progress on cost efficiencies, and variable profit increases on new and refreshed vehicles.
--Capital spending exceeds 5% of revenue over the intermediate term, reflecting the company's plans to increase investment over the next several years.
--Dividends rise over the intermediate term, consistent with the company's plan to return cash to shareholders.
--GM targets virtually all of its FCF toward share repurchases over the intermediate term.
--The company maintains an automotive cash and cash equivalents balance of about $20 billion.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining a North American EBIT margin near 10% on a sustained basis;
--Generating positive EBIT in the company's European operations;
--Maintaining a FCF margin of 2% or higher;
--Continued growth in global sales and/or market share, especially in the U.S. and China.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A decline in the company's automotive cash position to below $20 billion for a prolonged period. This could be the result of a change in financial policy, a negative recall-related development, or a need to provide General Motors Financial Company, Inc. (GMF) with liquidity support.
--A sustained period of negative FCF excluding recall-related costs;
--An unexpected merger or acquisition that materially weakens the company's credit profile.
Fitch maintains the following ratings on GM and its subsidiaries with a Stable Outlook:
GM
--Long-term IDR at 'BBB-';
--Unsecured credit facility rating at 'BBB-';
--Senior unsecured notes rating at 'BBB-'.
GMF
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Short-term IDR at 'F3'.
Opel Bank GmbH
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.
GMAC (UK) Plc
--Long-term IDR at 'BBB-';
--Short-term IDR at 'F3';
--Short-term debt at 'F3'.
General Motors Financial International B.V.
--Long-term IDR at 'BBB-';
--Term Note Program at 'BBB-'.
Date of relevant rating committee: June 17, 2015
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' (August 17, 2015).
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999646
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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