DBRS Confirms General Motors Corporation at B and Trend Changed to Stable

DBRS has today confirmed the ratings of General Motors Corporation (GM or the Company) and its related subsidiaries at B and changed the Trends to Stable from Negative. The rating actions reflect positive developments at the Company’s dominant North American operations (GMNA), which have reduced downside risk to the rating. GMNA has made steady progress in reducing its structural costs and has signed a new contract with the United Auto Workers (UAW) that should help to improve its cost position. However, GMNA remains unprofitable, and it is uncertain that GMNA would be able to maintain its positive momentum as the U.S. automobile market is showing signs of softening. DBRS notes that continuing improvements in GMNA’s operating results, particularly from stabilizing retail sales and a reversal of the deficit in free cash flow in the Automotive operations, could lead to positive rating actions.

The Company announced on September 26, 2007 a tentative agreement on a new four-year contract with the UAW. DBRS deems the ratification of the contract, announced on October 10, 2007, to be a very positive event. (1) The ratification has removed a significant risk to GM of a potentially crippling labour disruption. (2) GMNA has gained some concessions from the UAW, such as a two-tier wage scale that DBRS believes will provide a good foundation for GMNA to narrow the wage gap with Asian producers. (3) A union-managed ‘new VEBA’ – Voluntary Employees Beneficiary Association – expected in early 2010, will take over the retiree healthcare liabilities and should further improve GMNA’s cost position. Additionally, the Company has also resolved the treatment of UAW members at Delphi Corporation (Delphi), GM’s largest parts supplier, as well as the contract claims with Delphi. The signing of a Memorandum of Understanding between the three parties would facilitate Delphi’s emergence from bankruptcy, and consequently eliminates the risk of a disruption in the supply of parts from Delphi that is critical to the ongoing operations at GMNA.

The Company’s Automotive operations have been reporting steady improvements in operating results in 2007 with most regions showing year-over-year increases in earnings. The strong growth in South America and China has been impressive, and is expected to continue. As such, the contribution from emerging markets is expected to gain in importance and be one of the key earnings drivers at GM in the near to medium term. GMNA has been successful in reducing structural costs, which is a key factor to its improving results. DBRS expects GMNA to meet its target of cutting $9 billion in structural costs (from the 2005 base) by the end of 2007. This, together with the potential of lower labour costs from the new contract, better positions GMNA to compete with Asian producers. Benefits from restructuring initiatives, combined with new model introduction, should help boost operating results in 2008.

However, the business risk profile of GMNA remains weak. GMNA is still unprofitable and continues to face significant challenges in the near term. (1) Notwithstanding the improvement in operating results, GMNA has not been effective in reversing the declining trend in unit sales and its overall market share despite the good reception of some new models and the relatively high sales incentives. Two recent negative market developments are likely to work against GMNA. Firstly, persistently high gasoline prices have caused consumers to turn away from the more-profitable large SUVs and pick-up trucks, the strength of GM’s product offerings. Secondly, the U.S. economy is showing signs of softening, impacted by a sharp deterioration in the residential housing sector. A weaker economy will likely slow the demand for automobiles and intensify competition, adding to GMNA’s challenge. Although product introductions in the next few years are expected to strengthen GMNA’s product cadence, it is still uncertain that these new models will successfully stabilize GMNA’s market position at a retail sale target of three million units, a critical level for GMNA’s recovery. (2) Capacity utilization at GMNA remains unsatisfactory, despite its ongoing downsizing efforts. Plant closures so far have not compensated for the sales volume decline. (3) GMNA used to benefit from price concessions from suppliers. With weakening financial health at most parts suppliers, as evidenced by a number of bankruptcy filings in recent years, DBRS believes that future price concessions will be difficult to achieve. Moreover, prices from some weak suppliers are more likely to rise to protect the supply base. The recent agreement with Delphi will likely lead to higher costs for GM, at least in the near term. Largely due to the above noted challenges, DBRS expects GM’s operating performance to modestly decline in 2H 2007. Over the longer term, a full recovery at GM will depend on how well it addresses the three key elements of its turnaround plan: (1) product excellence; (2) a revitalization of it sales and marketing strategy, and (3) an acceleration in cost reductions and quality improvements.

In addition to the uncertainty of a sustained turnaround in the Automotive operations, GMAC LLC, (GMAC, its 49%-owned finance subsidiary), is experiencing difficulties at Residential Capital LLC (ResCap), its mortgage subsidiary. The collapse in the sub-prime residential mortgage market has led to heavy losses at ResCap, which for the first half of the year, more than offset the earnings in GMAC’s non-ResCap operations. (See DBRS report on GMAC and ResCap for details.) The deteriorations at ResCap, if not stabilized, could spill over and weaken the financial profile of GM.

The Company’s above-average liquidity position continues to be a positive, providing support for its ratings. GM has gross cash on hand of about $27.2 billion at the end of June 30, 2007, proceeds from the sale of the Allison Transmission ($5.6 billion), and available committed bank lines, which further add to GM’s liquidity. Cash usage at GM is expected to be significant over the next few years : (1) Despite improving operating results, the Automotive operations are expected to incur a deficit in free cash flow due to the ongoing capital investment and the funding of restructuring initiatives. (2) The agreement with Delphi is expected to cost about $8 billion in the next few years. (3) The creation of a new VEBA is expected to cost about $29.9 billion in early 2010. Nevertheless, DBRS expects the Company to have adequate liquidity to fund its various commitments. Moreover, the average maturity of GM’s debt is about 17 years. The modest debt maturity schedule further adds to GM’s financial flexibility.

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