GM says ratings upgrade will aid lending arm, support global sales push

GM's performance over recent months has shown that recalls haven't impacted sales, S&P says. Photo credit: BLOOMBERG

DETROIT -- General Motors plans to take advantage of its return to investment grade, which could lower borrowing costs, by strengthening its lending arm, CFO Chuck Stevens said.

Standard & Poor's Ratings Services upgraded both GM and General Motors Financial Co. to BBB- on Thursday, citing progress in Europe, healthy cash flow and limited reputational and market-share damage as a result of the company's record recalls.

The upgrade is another step in the recovery of the onetime symbol of America's industrial might as it rebuilds with a new finance unit focused on helping drive vehicle sales.

GM was forced to sell control of its former GMAC lending unit to a hedge fund in 2006 to raise money to stay in business, and risky home loans ultimately forced that lender into bankruptcy.

Now it has a smaller, more strategic, finance arm that is getting stronger.

"This ultimately supports GM Financial and our planned expansion of that business globally, which ultimately helps us sell more cars globally and improves customer loyalty," Stevens said in an interview. "That's, first and foremost, the benefit of this upgrade."

The new GM Financial was formed out of the $3.5 billion purchase in 2010 of subprime lender AmeriCredit Corp.

The GM lending unit bought Ally Financial Inc.'s international operations in South America and Europe in 2012 and is working to acquire the rest of Ally's joint-venture operations in China, said Jim Cain, a GM spokesman.

GM Financial, also known as GMF, was rated BB by S&P until Thursday when it was deemed a "core" subsidiary.

Unsecured market

"The most important aspect of this is equalizing and upgrading GMF and their ability to access the unsecured market in a competitive way as we continue to look to expand that business," said Stevens, who was CFO of GM's Southeast Asia unit when the automaker's debt was first cut to junk in 2005.

Lending to car-buyers with imperfect credit has come under federal scrutiny.

The Justice Department is seeking documents on underwriting criteria, origination, warranties and securitization of subprime loans since 2007, GM Financial said in a filing last month.

The availability of credit has helped spur five straight years of rising U.S. auto sales.

GM Financial acquired a Canadian leasing company and in the U.S. has expanded into prime leasing and finance as well as dealer-inventory financing, Cain said. Ally is the new name of GM's former GMAC LLC.

GM, the world's largest automaker as recently as 2011, is looking to shore up its global lending to increase sales after it slipped to third in the world behind Toyota Motor Corp. and Volkswagen AG.

Stevens: "We've been relatively clear in our intent to maintain low debt. There's enough operating leverage in the business that we certainly don't want to overlay financial risk."

'Another milestone'

"This is yet another milestone in moving further away from the bankruptcy period," said Michelle Krebs, an analyst with researcher AutoTrader.com in Royal Oak, Mich. "They have gotten their financial house in order and this shows that they can now withstand things like the recall."

The upgrade, five years after a $49.5 billion government-backed bankruptcy, comes even as Kenneth Feinberg weighs hundreds of claims for damages related to deaths and injuries resulting from a faulty ignition switch in small cars.

S&P said credit measures will remain strong over the next year or so even after recall-related costs.

"We wanted to understand the impact of the recalls from a reputational standpoint as well as the effect they might have on the market share," said Nishit Madlani, an analyst at S&P. "The company's performance over recent months has shown that recalls haven't impacted sales. Reputational damage did not transpire, for the most part."

Low debt

GM has put most of the anticipated costs behind it by the second quarter, other than some possible "tails" from ongoing additional incidents, Stevens said. Beyond the improved lending outlook for GM Financial, Stevens said he doesn't expect the upgrade to spur additional borrowing for the parent company.

"I wouldn't say that this upgrade will trigger any more or less activity as it relates to the debt market," he said in the interview. "We've been relatively clear in our intent to maintain low debt. There's enough operating leverage in the business that we certainly don't want to overlay financial risk."

GM shares fell 2.3 percent to $32.87 at the close in New York Stock Exchange trading on Thursday, before the upgrade was announced. The stock has tumbled 20 percent while the S&P 500 Index has gained 6.4 percent this year.

Crisis subsiding

The upgrade is an important milestone for the automaker as it tries to move past its biggest crisis since emerging from bankruptcy. The U.S. government sold its last GM shares in December.

GM also said in January it would pay a dividend of 30 cents a share, the first quarterly payment since July 2008.

"It's taken an awful lot of money to get to this point," John Casesa, senior managing director at Guggenheim Partners, said in an interview. "The company has been completely recapitalized by the government of the United States."

The automaker has also taken advantage of its new lease on life by slimming down its brands and operations, and changing the way it operates, he said.

An agreement with unions to have new workers assemble vehicles for less pay than older workers means that GM now makes money building cars -- not just trucks -- which it couldn't do before the union agreement and restructuring in bankruptcy, he said.

'Operating story'

"There is an operating story here, too," Casesa said. "It's a much more streamlined company which has taken drastic steps."

In a further sign of GM's moves to get beyond the recall stigma, CEO Mary Barra this week appeared with Alibaba Group Holdings Chairman and founder Jack Ma at the annual Clinton Global Initiative event in New York.

Later that day, Barra accepted an award from the Appeal of Conscience Foundation, an interfaith organization that honors leaders for putting social responsibility ahead of business results.

"Delivering segment-leading vehicles, improving the efficiency of our operations and building a fortress balance sheet made this upgrade possible," Barra said in a statement. "While we are not yet satisfied, and know we have work to do, I am confident that our renewed focus on our customers will drive even stronger business results."

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