S&P Cuts General Motors to CCC+

The ratings agency cites the automaker's expanding cash losses

From Standard & Poor's RatingsDirect

On Nov. 7, Standard & Poor's Ratings Services lowered its ratings, including the corporate credit rating, on General Motors Corp. (GM)to CCC+ from B- and removed them from CreditWatch, where they had been placed with negative implications on Oct. 9, 2008. The outlook is negative.

Earlier on Nov. 7, we also lowered the issuer credit ratings on GMAC LLC, the auto and real estate finance company owned 49% by GM and 51% by an investment consortium led by Cerberus FIM Investors LLC, and on GMAC's Residential Capital LLC mortgage unit (CCC-/Negative/C).

The downgrade reflects expanding cash losses in GM's operations caused by sharply lower U.S. and now European light-vehicle sales and the recent dramatic shift in demand away from large pickup trucks and SUVs in the U.S. We expect cash outflows to quickly reduce the company's liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy.

"We now believe GM will use much more cash this year than our previous estimate of as much as $16 billion in its global automotive operations," said Standard & Poor's credit analyst Robert Schulz. This will include cash restructuring costs and costs related to bankrupt former unit Delphi Corp. This cash use may continue unabated in the early part of 2009, even as the company continues to aggressively slash costs and conserve cash. GM's cash balances as of Sept. 30, 2008, were $16.2 billion; the company has stated that it needs $11 billion to $14 billion to operate.

GM's situation has become increasingly dire in light of the weakening global economic outlook and the state of the capital markets, leaving its ability to reduce its cash use through internal actions highly dependent on factors beyond its direct control. There has been periodic speculation that GM or another of the Michigan-based automakers might eventually seek to reorganize under Chapter 11 bankruptcy protection. We believe the most likely trigger for a financial restructuring or bankruptcy filing continues to be cash reserves falling to dangerously low levels.

GM may ultimately receive loans or other financial support from the U.S. government, but GM said today it is no longer exploring a merger with Chrysler LLC (CCC+/Negative/--). Although we expect federal assistance to arrive early in 2009, or perhaps sooner, in connection with a $25 billion government loan program, the form, timing and magnitude of this and any further assistance are difficult to predict. It is important to stress that we would likely view such assistance as buying more time for GM rather than as a solution to its fundamental business risks, including deteriorating global demand. Likewise, we would not view any resumption of talks involving GM and Chrysler–-or any other automaker–-even in combination with government support, as a panacea for these companies' credit concerns.

In any event, our most fundamental and serious concerns regarding GM remain unchanged: the pressures on liquidity facing both GM and its finance affiliate GMAC during the rest of this year and 2009, caused by the rapidly weakening state of most automotive markets globally, and continued turmoil in the credit markets.

We expect U.S. light-vehicle sales of 13.7 million units or less this year, the lowest in 15 years and down sharply from 16.1 million units in 2007. We also expect sales to fall further in 2009, to about 13 million units or less, as the economy remains weak and housing prices and consumers' access to credit remain under pressure. The outlook for other major auto markets, including Europe, has suddenly turned much bleaker in the past few months as economic woes have dampened automotive demand beyond the U.S.

The ratings reflect the possibility that the multiple problems the company faces in stemming cash outflows will eventually overwhelm its cash and liquidity during 2009.