Fitch Affirms General Motors' and General Motors Financial's IDRs at 'BB+'; Outlook Positive
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+'. In addition, Fitch has affirmed GM Holdings' secured revolving credit facility rating at 'BBB-' and GM's senior unsecured notes rating at 'BB+'. The Rating Outlook for GM and GM Holdings is Positive.
Fitch has also affirmed the long-term IDRs and senior unsecured debt ratings of General Motors Financial Company, Inc. (GMF) and its affiliates at 'BB+' and the short-term IDRs of GMF and its affiliates at 'B'. The Rating Outlook for GMF and its affiliates is also Positive.
A complete list of rating actions is included at the end of this release.
KEY RATING DRIVERS - GM
GM's ratings continue to be supported by the auto manufacturer's low automotive leverage, very strong liquidity position, reduced pension obligations, strengthened product portfolio and the free cash flow (FCF) generating capability of its automotive operations. GM's ratings are further supported by the global diversity of its business, as it remains one of the largest auto manufacturers in most regions of the world, holding a strong presence in key developing markets, such as China and Latin America.
The Positive Outlook reflects the trajectory of the underlying trends in GM's core business. Fitch expects the profitability of the company's key North American business to continue growing on a combination of pricing strength and further operational efficiency. Outside North America, GM's European operations remain on track to meet or exceed the company's mid-decade break-even target, while the company's Chinese joint ventures (JVs) continue to be an important source of cash despite heightened competition in that market. The funded status of the company's pension plans has improved materially over the past several years, especially in the U.S., and steps the company has taken to de-risk the plans are likely to significantly reduce volatility in the pension liability as interest rates change in the future.
Fitch's primary concern is the potential for GM to experience significant cash costs resulting from the substantial number of recalls announced in the first half of 2014. Although the direct costs of the recall will be material, the greater concern is the large number of lawsuits and various investigations that have been initiated in the wake of the recalls, which could potentially have a significant adverse effect on the company's cash flow. Other concerns include GM's North American profitability, which continues to lag certain key competitors, as well as significant restructuring activities that the company has undertaken in various international regions.
Although GM's core business is performing well, significant concerns have arisen over the past six months as the company has recalled over 29 million vehicles for a variety of safety-related issues. The bulk of the recalls have affected vehicles that are out of production, and there has been no discernible effect on sales of current GM vehicles. In the first half of 2014, GM recorded $2.5 billion in charges to cover the direct cost of the recalls. Fitch expects the recall charges to translate to cash costs, most of which will likely be seen in the second half of 2014 and into early 2015. However, significant uncertainty remains over the potential outcome of numerous lawsuits and federal and state investigations resulting from a decade-long delay in recalling 2.6 million vehicles with faulty ignition switches. The company has also set up a fund to compensate victims of accidents related to those switches. GM estimates the cost of the fund will be $400 million, although the company has noted that it could rise to as much as $600 million. However, there is no cap on the fund, and the actual cost will depend on the number and nature of the approved settlements.
A number of lawsuits are currently awaiting a bankruptcy court decision as to whether they should be treated as prepetition or post-petition claims. Fitch sees the outcome of the bankruptcy judge's decision as potentially material to GM's credit profile, as a decision to treat all or a significant portion of the suits as prepetition claims will reduce GM's potential liability. On the other hand, a decision allowing the lawsuits to go forward as post-petition claims could expose GM to significant cash costs. Likewise, the investigations currently underway by the U.S. Department of Justice (DOJ) and a number of state attorneys general could lead to further cash settlement costs or fines. Fitch will consider any near-term developments related to the lawsuits and investigations in its ongoing evaluation of GM's ratings and will undertake rating actions as necessary.
Although the potential follow-on costs of the recalls are a significant concern, Fitch has maintained its Positive Outlook on the company's ratings. Fitch believes that GM's substantial automotive liquidity position, which stood at nearly $39 billion at June 30, 2014 (including revolver availability), provides sufficient cushion to deal with several simultaneous adverse developments. Furthermore, any cash outlays are likely to take place over an extended period, perhaps two or more years, and Fitch forecasts that the company's core operations will be FCF positive over the intermediate term. Nonetheless, a significant number of adverse developments over a short timeframe could have a meaningful negative effect on GM's liquidity position.
GM continues to focus on restructuring its operations in various regions of the world, which Fitch expects will result in improved margin performance outside the U.S. over the intermediate term. In Western Europe, the company's plan to close its Bochum, Germany, plant remains on track for completion by year-end 2014, and the exit of the Chevrolet brand from the region appears to be running somewhat ahead of plan. Also, on July 1, 2014, GM centralized control over all of its European operations under the newly-formed Opel Group, which will help to better align the company's strategic direction and improve efficiency in the region. Combined with a strengthening auto market, these initiatives have already contributed to an improved financial performance in Europe, and the company appears to be making progress to achieve, or exceed, its mid-decade breakeven target.
In addition to its work in Western Europe, the company announced in late 2013 that it would cease manufacturing operations in Australia by year-end 2017, although it will continue to sell imported vehicles in the country. GM is also evaluating its South Korean operations, as the exit of Chevrolet from Western Europe has led to a decline in vehicle production in that country, although a portion of this decline may be offset by exports to other regions. GM plans to use cash generated in North America and from its Chinese JVs to fund its restructuring activities.
GM's Chinese operations, conducted through unconsolidated JVs, continue to perform well and remain important to GM's credit profile as a key source of cash for the company. Although GM had a slight market share loss in China in the first half of 2014, it nonetheless continues to hold a significant share of the Chinese market, at 14.4% in the first half of 2014. The upcoming introduction of another SUV to the market is likely to support GM's market share in the country. GM's equity in the earnings of its Chinese JVs totaled $1.1 billion in the first half of 2014, and Fitch estimates dividends from the Chinese JVs comprised the majority of the $1.3 billion in dividends received from JVs in the period. The Chinese government's recently launched antitrust investigations of a number of automakers and auto suppliers, including GM, is somewhat concerning, although Fitch does not expect an adverse outcome would have a material effect on GM's overall credit profile.
LIQUIDITY AND FCF
GM's automotive liquidity remains very strong. As of June 30, 2014, the company's automotive cash, cash equivalents and marketable securities totaled $28.4 billion. In addition, the company had $10.4 billion in availability on its two secured revolving credit facilities. Total automotive liquidity of $38.8 billion was up from $38.3 billion at year-end 2013 and $34.8 billion at June 30, 2013. GM's cash liquidity remains well above the $20 billion in total liquidity that Fitch views as necessary for meeting normal operational needs while providing a cushion in the event of an unexpected downturn.
FCF (calculated by Fitch as automotive cash from operations less capital expenditures and dividends, both common and preferred) was $2.8 billion in the 12 months ended June 30, 2013. This included the initiation of a common dividend in the first quarter of 2014 that amounted to an approximately $1 billion use of cash in the first half of 2014. In the 12 months ended June 30, 2013, FCF was ($193) million. However, this included $2.3 billion used in conjunction with the transfer of most of the U.S. salaried pensions to a group annuity contract in the latter half of 2012. Even after adjusting for that, however, FCF, including the common dividend, was higher in the most recent period. Fitch expects GM's core underlying automotive business to be FCF positive over the next several years, although actual automotive FCF in 2014 could be modestly negative as a result of recall-related costs.
In addition to cash outflows tied to recall activity, GM has several other significant cash outflows likely over the next six to 12 months. The company has previously noted that it intends to increase its equity stake in GMF by a further $700 million when the financial subsidiary closes on its purchase of Ally Financial's stake in a Chinese JV, which is likely to occur in late 2014 or early 2015. It also intends to repurchase the remaining Series A preferred stock outstanding, which it has the ability to do beginning Dec. 31, 2014. The liquidation amount for the Series A preferred stock is $3.9 billion. Fitch estimates that capital expenditures will be about $4 billion in the latter half of 2014, and total dividend spending (including common and preferred dividends) is likely to be about $1.2 billion in the second half of the year.
PROFITABILITY AND LEVERAGE
Although GM's profitability continues to strengthen, it remains lower than several of its primary competitors. In North America, GM's first-half 2014 EBIT-adjusted margin (based on the company's figures) would have been 8.6%, excluding $2.3 billion in recall charges, up from 7.3% in the first half of 2013 but still below several mass-market competitors, as well as the company's own 10% margin target. Fitch's calculated EBITDA margin for the full company's auto operations in the 12 months ended June 30, 2014, was 6.8%, including the recall charges, and the company's FCF margin was 1.8%. Although both figures represent an improvement from the year-earlier period, they continue to fall below several key global mass-market automakers. Fitch expects GM's profitability to increase as it focuses on improving its product portfolio and improved operational efficiency. A sustained increase in margins relative to its competitors would be a driver of a potential future upgrade.
GM's automotive leverage remains low for the rating category. As of June 30, 2014, leverage (automotive debt/Fitch-calculated EBITDA) was only 0.7x, and funds from operations (FFO) adjusted leverage was 0.9x. GM ended the second quarter of 2014 with $7.5 billion in automotive debt, primarily comprised of senior unsecured notes, non-U.S. bank borrowings, non-U.S. private note placements and capital leases. Excluding the senior unsecured notes, the majority of GM's remaining consolidated automotive debt is non-recourse to the parent company. Along with its strong liquidity position, GM's low leverage is an important contributor to the company's financial flexibility.
The funded status of GM's pension plans has improved significantly over the past several years. As of year-end 2013, GM's global pension plans (including unfunded plans outside the U.S.) were underfunded by $20 billion, with only $7.3 billion of that amount in the U.S. This was down from a global underfunded status of $28 billion, including $14 billion in the U.S., at year-end 2012. In percentage terms, the funded status of GM's U.S. plans was about 90% at year-end 2013, up from 83% at year-end 2012. Most of the year-over-year improvement was the result of an increase in the assumed interest rate used to discount the obligations. For the U.S. plans, the company used a discount rate of 4.46% in 2013 versus 3.59% in 2012, and for the non-U.S. plans, the discount rate increased to 4.1% from 3.7%.
With the substantial improvement in the funded status of GM's pension plans, the company's contribution requirements have declined. In 2014, GM has no required contributions to its U.S. plans, although it expects to contribute $100 million to its non-qualified U.S. plans. Outside the U.S., where a substantial portion of the company's pension obligations are in unfunded plans, the company expects to contribute $749 million. GM continues to shift the allocation of its pension plan assets to reduce the plans' sensitivity to interest rate changes. It is unlikely that the company will have any required contributions to its U.S. plans over the next several years.
GM Holdings' 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, which includes most of the company's tangible assets in the U.S. According to Fitch's notching criteria, 'BBB-' is the highest possible security rating for an issuer with an IDR of 'BB+'.
KEY RATING DRIVERS - GMF
The rating affirmation of GMF and its affiliates reflect the direct linkage to GM's ratings. Fitch considers GMF to be a 'core' subsidiary of GM based on actual and potential support provided to GMF from GM, increasing percentage of GMF's earning assets related to GM, and strong financial and operational linkages between the companies. The ratings also reflect GMF's seasoned management team, improving funding profile, consistent operating performance, good asset quality, and adequate capitalization and liquidity.
GROWTH IN EARNING ASSETS
As a result of Ally Financial's international operations (IO) acquisition, earning assets have experienced a significant shift in terms of credit composition, with subprime loans declining to 32% of total earning assets as of June 30, 2014, from over 80%, at the end of 2012, which is viewed positively by Fitch. Earning assets ended at $36.9billion in the second quarter of 2014 (2Q'14), up 41% from $26.2 billion in 2Q'13, driven primarily by the addition of the IO assets and significant growth in leasing. Lease originations increased to $1.5 billion in 2Q'14, up 88% from $0.8 billion in 2Q'13, driven by competitive product offerings and increased dealer acceptance. End of period lease balance was $4.7 billion at June 30, 2014, up 74% from $2.7 billion at June 30, 2013. Fitch notes that leasing is a relatively riskier strategy as it further exposes the company to residual value risk. Fitch expects the company to conservatively assess residual values, particularly in the current market where used car values remain unusually high and are expected to moderate.
Earning assets are expected to grow as GMF is expanding its dealer and commercial lending business and is in the initial stages of rolling out a prime lending platform. Fitch will monitor the company's growth and expansion into these products paying particular attention to underwriting standards, credit quality, profitability and leverage metrics.
OPERATING PERFORMANCE NORMALIZING
Operating performance remains solid driven by growth in earning assets, but margins and return ratios are gradually declining reflecting the run-off of higher-yielding pre-acquisitions receivables and the general shift in the asset mix from higher-return, higher-risk subprime loans to lower-return, lower-risk prime and commercial loans. Net income increased to $320 million in 1H14, up 13% from $284 million in the first half of 2013 (1H'13), driven by higher operating lease income and contribution from the IO business, which was partially offset by higher provisioning expense due to credit normalization and higher interest expense from the IO business. Pre-tax margin was a solid 21.3% in 1H'14, but down compared to 31.5% in 1H'13, primarily due to inclusion of the lower-return IO business. Fitch expects GMF to remain solidly profitable through the remainder of 2014 and 2015; however, margins are expected to decline as prime quality receivables, which typically have lower APRs, are added to the portfolio, thus bringing down the average portfolio yield.
SOLID ASSET QUALITY
GMF's asset quality continues to be strong; however, asset quality metrics are expected to slightly weaken in 2H'14, driven by normalizing credit performance, weaker seasonal trends in the fiscal second half, and an overall shift in the portfolio vintage. This decline should be partially offset by the increase in prime quality receivables from the IO business, and the roll-out of prime lending in the U.S., which should help maintain the overall asset quality of the portfolio. On a consolidated basis, net charge-offs were 1.9% and 1.4% in 2013 and 2Q'14, respectively, compared to 2.5% and 1.4% in 2012 and 2Q'13, respectively, due to the inclusion of the IO portfolio, which is primarily prime quality and therefore carries fewer losses. On a consolidated basis, delinquencies were 5.8% and 5.1% in 2013 and 2Q'14, respectively, compared to 8.2% and 4.8% in 2012 and 2Q'13, respectively. Improved credit performance, particularly in the U.S., has been influenced by improved recovery rates on repossessions due to a robust used car values. Fitch expects recovery rates to normalize as used car values moderate from the current high levels, further supporting its view on normalizing credit trends.
IMPROVING FUNDING PROFILE
GMF's funding profile has improved since GM's acquisition, with increasing access to unsecured debt markets. Still, the company relies heavily on secured debt, with approximately 77% of funding in the form of ABS debt and secured revolving (warehouse) facilities as of 2Q'14. Unsecured debt has increased to account for 23% of total funding in 2Q'14, from 14% in 2012 and 6% in 2011. Furthermore, in July 2014, GMF issued $1.5 billion in senior unsecured notes at attractive spreads. Fitch expects unsecured debt as a percentage of total debt will gradually increase going forward.
ADEQUATE LEVERAGE AND LIQUIDITY
Capitalization and leverage levels have been adequately maintained to reflect the growth and riskiness of earning assets. However, leverage has increased since the IO acquisition, which is comprised of relatively lower risk assets. Leverage, measured as debt to tangible equity, increased to 6.0x at June 30, 2014 from 5.8x at year-end 2013 (YE13), and 3.3x at YE12. Management calculated leverage (earning assets to tangible equity) was 6.9x at June 30, 2014 and was in line with its articulated target of 6.0x to 8.0x. Leverage is expected to slightly increase with the close of China JV acquisition and the continued roll-out of the prime lending platform. On a risk adjusted basis, leverage is in line with other Fitch-rated auto captives, whose underlying portfolios are of higher credit quality compared to GMF's. Further increase in leverage without a commensurate decline in riskiness of the earning assets will be viewed negatively by Fitch.
GMF's liquidity position is adequate at $4.8 billion as of June 30, 2014, including $1.4 billion in unrestricted cash, $1.8 billion of borrowing capacity on unpledged assets, $1 billion of borrowing capacity on committed unsecured credit lines and $600 million borrowing capacity on its intercompany credit facility. Liquidity is further enhanced by GMF's $1 billion tax deferral agreement with GM and GM's decision to not take any dividends out of GMF to date. Unsecured debt maturities are manageable with $1 billion of senior notes coming due in 2016.
RATING SENSITIVITIES - GM
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Increasing the North American EBIT margin to near 10% on a sustained basis.
--Improving the profitability of the company's European operations.
--Sustained positive FCF generation, excluding unusual items.
--Increased clarification that the follow-on costs of the recalls can be managed while keeping automotive cash liquidity at $20 billion or higher.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A decline in cash liquidity below $20 billion for a prolonged period.
--Significant negative developments related to the recalls that result in a greater-than-expected cash outflow.
--A sustained period of negative fCF generation.
--A change in financial policy, particularly around maintaining high liquidity and low leverage.
--A need to provide extraordinary financial assistance to GMF in the case of a liquidity event at the finance subsidiary.
RATING SENSITIVITIES - GMF
The Positive Rating Outlook on GMF is linked to that of its parent. GMF's ratings will move in tandem with its parent. Any change in Fitch's view on whether GMF remains core to its parent could change this rating linkage with its parent. A material increase in leverage without a corresponding decrease in the risk of the portfolio, an inability to access funding for an extended period of time, and/or significant deterioration in the credit quality of the underlying loan and lease portfolio, could become restraining factors on the parent's ratings.
Fitch has affirmed the following ratings with a Positive outlook:
--Long-term IDR at 'BB+';
--Senior unsecured rating at 'BB+'.
--Long-term IDR at 'BB+';
--Secured revolving credit facility at 'BBB-'.
--Long-term IDR at 'BB+';
--Senior unsecured debt at 'BB+';
--Short-term IDR at 'B';
GMAC Bank GmbH
--Long-term IDR at 'BB+';
--Senior unsecured debt at 'BB+';
--Short-term IDR at 'B';
--Commercial paper at 'B';
GMAC (UK) Plc
--Long-term IDR at 'BB+';
--Short-term IDR at 'B';
--Short-term debt 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 (May 28, 2014);
-- Global Financial Institutions Rating Criteria (Jan. 31, 2014);
-- Finance and Leasing Companies Criteria (Dec. 11, 2012);
-- Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Global Financial Institutions Rating Criteria
Finance and Leasing Companies Criteria
Rating FI Subsidiaries and Holding Companies