DBRS Confirms General Motors and General Motors of Canada at B and R-5, Trends Remain Negative

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of General Motors Corporation (GM, or the Company) and General Motors of Canada Limited at B and R-5 and the trends remain Negative. The rating action reflects the fact that the financial profile of GM remains weak and the Company continues to face considerable headwinds to stage a recovery. Moreover, the task of turning around its troubled North American automotive operations (GMNA) has become tougher due to a high risk of a slowdown in vehicle demand in North America due to persistent high gasoline prices and rising interest rates.

DBRS notes that the weak financial profile of GM is due to large losses at GMNA. Issues affecting GM are well documented.

(1) GM could face a liquidity crisis as a result of a labour dispute over wages at the bankrupt U.S. operations of Delphi Corporation (Delphi), GM’s largest parts supplier and a former subsidiary. Labour tension at Delphi has eased recently, reducing the odds of an extended strike but the risk still exists. DBRS believes that a negotiated settlement rather than a protracted strike is the most likely outcome at Delphi. However, DBRS expects that any agreement between Delphi and its unionized employees would involve financial assistance from GM. Even though GM should have no problems funding the settlement, GM’s liquidity position would be weakened as a result.

(2) GMNA has been ineffective in stopping its market share decline. Stabilizing market share is critical to GMNA’s turnaround.

(3) Capacity utilization at GMNA remains unsatisfactory despite its ongoing downsizing efforts.

(4) The large legacy cost burden, high wage rates and employee benefit costs, and the costly “jobs bank” for temporarily laid off workers make GMNA one of the highest cost automobile manufacturers. The restrictive labour contract and a large number of inflexible production lines also limit GMNA’s ability to improve operating efficiency.

(5) GMNA used to benefit from price concessions from suppliers. With weakening financial health at most parts suppliers, as evidenced by recent bankruptcy filings, further price concessions will be difficult to achieve. Moreover, prices from some weak suppliers are more likely to rise to protect the supply base. In addition, the recent rapid run-up in commodity prices further adds to GMNA’s cost base.

DBRS notes that there are a number of positive developments supporting the current ratings. Recent concessions (employee benefits reduction) by the unions at GMNA will lead to $3 billion savings per year. This also signals the unions’ willingness to assist GM to turn itself around, which bodes well for the upcoming contract negotiations. The employee attrition program has been well received, allowing GMNA to achieve its headcount reduction target two years ahead of schedule. Moreover, plant closures are progressing as planned, allowing GMNA to rightsize its manufacturing capacity and improve cost competitiveness. A strong pipeline of new products is expected to strengthen GMNA’s product cadence and its ability to stabilize market share. Furthermore, GM continues to have an above-average liquidity position and is expected to be able to fund its normal operations and restructuring initiatives. GM has agreed to sell a 51% stake in GMAC to Cerberus Capital Management, and GM will receive $10 billion at closing, adding to its liquidity. The transaction is scheduled to close in the fourth quarter of 2006 but the FDIC’s decision to stop accepting/approving any applications for at least six months could potentially delay the closing (see the DBRS press release dated August 2, 2006, for details).

DBRS notes that, going forward, GM’s ratings will largely be dependent on the turnaround of GMNA, a task that has become tougher due to a high risk of slowdown in vehicle demand in North America from persistent high gas prices and rising interest rates. The upcoming contract negotiations with the United Auto Workers unions (UAW) in September 2007 will be another key event affecting GMNA. A lack of meaningful progress in GMNA would likely lead to downgrades of the current ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The Convertible Debentures contain certain unique covenants that give them some equity-like characteristics.
The Commercial Paper ratings were revised to R-5 due to a technical change in some of the CP rating definitions.