kansaiwalker1

Thursday, May 12, 2005


GM seeks separate rating for GMAC debt


By Tom Sullivan / Dow Jones Newswires


NEW YORK - General Motors Corp., hit with credit rating downgrades to junk last week by Standard & Poor's, is seeking to put some distance between itself and its lending subsidiary, General Motors Acceptance Corp.

In its latest quarterly filing with the Securities and Exchange Commission, GM said it is seeking to lessen the effect of the downgrades, which will increase its borrowing costs because of higher risk associated with its debt. GM said it's "exploring whether actions could be taken that would provide a basis for rating agencies to evaluate GMAC's financial performance in order to provide GMAC with ratings independent of those assigned to GM."

GM, buffeted by increasing pension and health care costs amid a declining share of the North American market and lower sales of its high-margin big sports utility vehicles, has seen its bonds come under severe pressure since mid-March, when it shocked markets by forecasting negative first-quarter cash flow. In April, GM reported a first-quarter net loss and suspended its full-year earnings guidance, and in early May, reported its a sharp drop in the sale of SUVs. S&P's downgrade, which arrived much sooner than the market was expecting, dealt a further blow.

S&P's action came just a day after GM's and GMAC's bonds had rallied on news that billionaire, value-savvy investor Kirk Kerkorian planned to raise his equity stake in GM to just under 9 percent _ raising some speculation that he might try to get the parent company to sell the finance unit.

"GM would probably resist the sale of all of GMAC since it would imperil GM's future business position, but Kerkorian is probably more concerned about a faster return of capital to shareholders," independent credit rating agency Egan-Jones Ratings Co. wrote in a research note Tuesday. The ratings company said GMAC might be worth $15 billion to $20 billion if sold.

GMAC has three major businesses. Roughly 55 percent of its business involves auto financing, while the rest revolves around commercial and residential mortgages, said Daman Blakeney, director at Victory Capital Management. "GM needs its relationship with GMAC" to sell autos through incentives like low-interest financing, he said.

And by seeking a higher rating for GMAC, GM is signaling it that expects to keep the unit, a cash cow for the company.

Some GM observers believe stockholders will ultimately see the importance of GMAC to the parent and oppose its sale.

"GMAC is giving the lion's share of net income to GM shareholders at this point, so what's the rationale?" asked HSBC auto analyst John Kollar. "That doesn't make sense," he said.

Moody's Investors Service and Toronto-based Dominion Bond Ratings Service, two of the four ratings agencies that carry the Securities and Exchange Commission's stamp of approval already rate GMAC a notch higher than GM while Fitch Ratings has indicated it would consider that option. S&P has been the most resistant to such a scenario.

Even if it fails to get Fitch or S&P to see its rating point of view, the company _ with $20 billion in liquidity at the end of the first quarter _ will still be able to access lower cost funding, a must for finance companies, though tapping the unsecured debt market isn't an option.

Instead, it can continue to raise capital through securitizations, repackaging the auto loans it makes to consumers and selling them on to investors, and by selling whole loans, entire batches of retail auto loans to third parties. But only up to a point, according to S&P, before that asset drain would start to hurt unsecured debtholders.

In the corporate bond markets, GMAC bonds have outperformed GM bonds _ perhaps reflecting the market hopes for more credit rating distinctions by the major raters.

Late Wednesday, GM's 8.375 percent bonds due 2033 were at 74.50 cents on the dollar, down about 1 cent, to yield 11.417 percent, according to MarketAxess, an electronic trading service. GMAC's 8 percent bonds due 2031 were down a similar amount at 81.75, yielding 9.699 percent.

Shares of GM fell 53 cents, or 1.7 percent, to close at $31 on the New York Stock Exchange.