S&P rating puts GM into junk territory

By Dow Jones Newswires
Posted Oct. 7, 2010 at 2:10 p.m.

Standard & Poor’s Ratings Services on Thursday gave a BB- corporate credit rating to General Motors Co., placing it three notches into junk territory and matching the level peer Fitch Ratings assigned Wednesday.

The moves come as GM plans to launch its initial public offering, an event some speculate will occur in November. The move will allow the U.S. government to begin offloading the 61 percent stake it acquired.

S&P said GM’s return to profitability in North America can be sustained, even if margins don’t improve significantly. It added that contribution from GM’s market share in the growing markets of Brazil and China, where sales are expected to remain vibrant, will also support the rating.

“We assume the company’s automotive operations in North America will remain profitable if U.S. light-vehicle sales are at or above current levels (more than 11 million units on an annualized basis), largely because of cost reductions that have lowered its breakeven point of sales,” said analyst Robert Schulz.

He added that despite weak recovery prospects in Europe, S&P believes GM has good prospects for generating positive cash flow for the rest of this year and 2011, as key U.S. auto markets gradually recover.

Still, risks remain — including competitive conditions in Europe, the company’s still-high dependence on light trucks for profitability in North America despite new-car introductions and the need for customers’ perceptions of its vehicles to improve. S&P also listed the outcome of GM’s efforts to broaden its lineup of smaller, more fuel-efficient vehicles in the next few years as a risk.

The rating also reflects S&P’s assumption that a portion of GM’s substantial cash balances will be used to address its massive global pension liabilities, which was underfunded in the U.S. by $17.1 billion as of the end of 2009. The rating, and its stable outlook, does not depend on completion of an IPO, S&P said.

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