MRO Magazine

Fitch: GM’s Liquidity Sufficient for Capital Deployment Plan


March 9, 2015
By Business Wire News

CHICAGO

Fitch Ratings expects General Motors Company’s (GM) cash liquidity to remain adequate despite its plan to return a significant level of cash to shareholders over the next two years. As such, Fitch does not expect any change to GM’s ratings or Outlook as a result of the plan. Fitch currently rates GM’s Issuer Default Rating (IDR) at ‘BB+’, and its Rating Outlook is Positive. A list of GM’s ratings is shown at the end of this release. Fitch’s ratings apply to two revolving credit facilities with a total capacity of $12.5 billion and $7 billion in senior unsecured notes.

This morning GM announced a capital allocation and share buyback strategy that will significantly increase the company’s cash returns to shareholders over the intermediate term, but it is less aggressive than the earlier proposal put forth by a group of the company’s shareholders. Following GM’s announcement, the shareholder group announced that it has withdrawn its proposal. GM’s plan calls for a total of $5 billion in share buybacks to be completed by year-end 2016 and about $5 billion in dividends to be paid over the same period. GM announced in February its intent to increase its dividend by 20% beginning with the June 2015 payment, and that will contribute to the increase in dividend payments. Beyond 2016, the company expects to return substantially all of its free cash flow (FCF) to shareholders. By contrast, the shareholder proposal had called for the company to repurchase $8 billion in shares over a 12-month period commencing in June 2015.

For creditors, a key piece of GM’s announcement is the company’s intention to maintain an automotive cash target of $20 billion. This compares with an actual automotive cash balance of $25.2 billion at year-end 2014. Fitch has previously stressed the importance of GM maintaining an automotive cash balance of at least $20 billion in order to provide a sufficient liquidity cushion in the event of a severe downturn. Fitch’s own forecasts suggest that even with the substantial shareholder returns outlined today, the company has the ability to maintain a cash balance above $20 billion over the next two years, even though total cash spent on dividends and share repurchases is likely to exceed the company’s pre-dividend FCF. However, in the event that FCF is weaker than expected, Fitch believes GM will adjust its share repurchase activity to avoid allowing cash to fall below the $20 billion threshold for an extended period. As Fitch has noted in the past, automotive cash falling below the $20 billion level for a prolonged period could lead to a negative rating action.

Fitch expects the company to repurchase shares solely using cash on hand and FCF, and therefore Fitch does not expect GM’s leverage to be affected by the program. At year-end 2014, EBITDA leverage (debt/Fitch-calculated EBITDA) remained low for its current ratings at 0.8x. Funds from operations (FFO) adjusted leverage at year-end 2014 was 1x.

Fitch continues to monitor various events stemming from last year’s recalls. Although it will likely be several years before all of the lawsuits and investigations are resolved, nearer term events that Fitch is following closely include the final outcome of the company’s ignition switch victim compensation program and a pending decision by the bankruptcy court on the pre-petition status of damages and injuries incurred prior to the 2009 bankruptcy of General Motors Corporation. Fitch would view a significant number of victims accepting awarded compensation as a credit positive, particularly if it were followed by a meaningful decline in the number of outstanding lawsuits. At the same time, a definitive court ruling that injuries or damages incurred prior to the 2009 bankruptcy are, in fact, pre-petition claims would also be a credit positive.

If GM incurs any significant near-term cash costs tied to any fines, penalties or settlements related to the recalls, Fitch expects the company will adjust its share repurchase activity, if necessary, in order to maintain its cash at the target level. If GM were to allow cash to fall below the target level and continue repurchasing shares, Fitch could consider a negative rating action.

GM, along with the other Detroit automakers, will be ramping up negotiations with the United Auto Workers (UAW) union on a new labor agreement later this year. As of the company’s 2014 proxy filing, the UAW was the largest single holder of GM’s common stock, with an 8.7% stake. UAW leadership previously commented publicly that it believed the $8 billion shareholder proposal was too high and premature, although the union suggested it might support some cash returns to shareholders. Based on the union’s comments, Fitch believes the $8 billion proposal would have complicated negotiations with the union, although it remains to be seen how the union will respond to the plan laid out today.

Fitch has previously outlined the following rating sensitivities that still apply to GM’s ratings:

Positive:

–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:

–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.

Fitch currently rates GM as follows:

GM

–Long-term IDR ‘BB+’;

–Unsecured revolving credit facility rating ‘BB+’;

–Senior unsecured notes rating ‘BB+’.

The Rating Outlook is Positive.

Additional information is available at ‘www.fitchratings.com‘.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Stephen Brown, +1 312-368-3139
Senior Director
Fitch Ratings Inc.
70 West Madison Street
Chicago, IL 60602
or
Craig D. Fraser, +1 212-908-0310
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com