Standard & Poor raised corporate credit rating on GM by two notches

Article by Christian A., on September 29, 2011

General Motors Co.’s corporate credit rating was raised by Standard & Poor's Ratings Services from 'BB-' to 'BB+'. Its rating outlook was changed from positive to stable. S&P also raised its issue-level rating on GM's debt to 'BBB' from 'BB+' while the recovery rating stays at '1'.

Standard & Poor's credit analyst Robert Schulz said that the upgrade represents its view that GM's prospects for generating free cash flow and profits in its automotive manufacturing business continue to solidify due to its cost base in North America. S&P also sees its prospects for a steady improvement in light-vehicle sales in North America into 2012.

The company estimates that the GM's automotive free operating cash flow in 2011 will be a minimum of $5 billion. This is about the same as 10 percent of the estimate of adjusted automotive and post-retirement debt in 2011. S&P assumed that GM can maintain its pretax EBIT margin in North America in the upper–single-digit percentage area and in the mid-single digit area in total for automotive.

GM is also expected to avoid incurring big losses in Europe. This upgrade looks at the continued assessment of GM's business risk profile as fair. Its financial risk profile is also seen to be significant.

According to S&P’s criteria, the combination of these profiles is consistent within a one-notch band of a 'BB' corporate credit rating. GM’s automotive operations in North America are expected to stay profitable, comparable to industry light-vehicle sales.

It may also post a sales figure that’s slightly lower than current levels (over 11.5 million units). It’s believed that GM has good prospects for achieving at least $5 billion in free cash flow from its automotive operations in 2012. This is expected even if the key U.S. auto market fails to recover significantly.

Just last month, GM launched its first sedan under a new China-only brand to tap the entry-level customers in the largest auto market in the world. GM is considered as the largest overseas carmaker in China. GM will commence sales of the new 1.5-liter four-door Baojun 630 sedan in China sale at prices ranging from CHY62,800 ($9,750) to CHY73,800. It will be offered in three versions and will be available through 120 dealers in eight cities, including Changsha, Harbin, and Nanning as well as Zhengzhou.

GM’s move follows that of Honda Motor Co., which spearheaded building cheaper China-only brands to increase sales among first-time customers. The US carmaker expects the Baojun brand to appeal to "young professionals and young families" in the so-called second- and third-tier cities.

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