DBRS Comments on U.S. Government Financing Provided to GM and Chrysler

DBRS notes that the U.S. government has today approved a financing package (the Financing) to assist General Motors Corporation (GM) and Chrysler LLC (Chrysler). The Financing is to be funded from the Troubled Asset Relief Program (TARP), which was initially designed for the financial sector. The $17.4 billion Financing will be allotted to GM and Chrysler, the liquidity positions of which are more severe than that of Ford Motor Company (Ford).

Of the $17.4 billion, $13.4 billion ($9.4 billion to GM and $4 billion to Chrysler) will be disbursed from December 2008 through January 2009, with an additional $4 billion made available in February 2009. The Financing consists of loans with a maturity of three years that would rank senior to all other debt to the extent permitted by law. Additional conditions include the following: the provision of warrants and non-voting stock; limits on executive compensation; and the ability of the U.S. government to block any large transactions (i.e., in excess of $100 million). Significantly, the Financing also requires the auto manufacturers to submit a further restructuring plan by March 31, 2009, that would effectively demonstrate their viability going forward; failure to do so would result in the loans being immediately callable.

DBRS notes that the Financing does not have any immediate impact on the ratings of GM and Chrysler. The proceeds are deemed just sufficient to enable them to maintain operations through March 2009. While the action has likely averted an immediate liquidity crisis for theses two companies, their liquidity positions remain very weak and have not fundamentally changed.

DBRS further notes that Ford is not included in the present Financing. Ford’s liquidity position is not as weak as that of GM or Chrysler, partially due to Ford having arranged a secured $18.5 billion financing package at the end of 2006. As a result, Ford has not sought immediate assistance from the U.S. government but has instead requested a $9 billion standby line of credit to be available should market conditions significantly deteriorate further next year.

Similarly, the business profiles of the Detroit 3 companies continue to be poor. Each of them has underperformed vis-à-vis already weak industry levels throughout this year as their product offerings (primarily pickup trucks and sport utility vehicles (SUVs)) have fallen into disfavour given increasing fuel costs (notwithstanding the significant moderation in fuel prices the past few months). This has been severely exacerbated in recent months by a dramatic drop in industry volumes triggered by much lower consumer confidence and restricted access to credit as the U.S. economic challenges have proliferated globally. While the Detroit 3 have sharply curtailed production volumes of the affected models, this has not been sufficient to avert a sharp acceleration of cash burn that has resulted in the current liquidity crises of both GM and Chrysler. In order to be ultimately viable, each of the Detroit 3 will have to right-size their operations consistent with lower industry volumes and likely reduced market share. The product mix of the Detroit 3 will also have to be significantly altered. While large vehicles (primarily pickup trucks) will continue to be manufactured, much greater focus will have to be placed on smaller, more fuel-efficient car models.

Contingent with further financing assistance from the U.S. government, targets have also been suggested that include (but are not limited to) the following: the restructuring of the capital structure of these companies; the renegotiation of voluntary employees’ beneficiary association (VEBA) obligations; and the transition of wages and work rules by the end of 2009 such that they are commensurate with that of the foreign auto manufacturers operating in the United States.

DBRS is of the opinion that, for the time being, previous rating actions related to the Detroit 3 sufficiently incorporate the current credit profiles of these companies. However, the extremely volatile market conditions do not preclude further rating actions in the near term. Additionally, the forthcoming restructuring plans of these auto manufacturers could also have rating implications.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.