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General Motors got some good news Friday: its first investment grade credit rating since going bankrupt in 2009.
DBRS, Canada's largest credit rating agency, upgraded GM to BBB (low) from BB (high), citing its robust financial profile due to a strong balance sheet, with low debt, and solid earnings performance over the past two and a half years. DBRS also upgraded Ford Motor to BBB (low), putting both U.S. automakers into investment grade territory.
The upgrades from "junk bond" levels are important because they reflect the companies' ability to repay their obligations. By reaching investment grade, both GM and Ford are considered less risky investments and therefore will be able to borrow money at lower interest rates. That, in turn, should further improve their profit outlook.
And while the largest U.S. ratings agencies - Moody's, Standard & Poor's and Fitch - still place GM one notch below investment grade, the upgrade in Canada, which loaned GM $9.5 billion in bankruptcy, is significant. GM repaid $1.3 billion in debt, and Canada recouped a portion of its remaining investment by selling shares through GM's initial public stock offering. It still owns 9 percent of GM. Down the road, Canada remains important to GM as a potential source of bond investors because its economy is growing faster than the U.S., and its dollar is strong.
GM's upgrade is also more proof that the U.S. car company, which received $49.5 billion in U.S. government aid, is not going bankrupt again, as Forbes contributor Louis Woodhill contended last month in a weak op-ed post that former GM vice chairman Bob Lutz quickly shot down. As I wrote at the time, leadership, not another bailout, will fix GM.
Here's what DBRS thinks of GM:
"While DBRS recognizes that the Company is currently facing significant headwinds in certain regions, notably Europe, this is expected to be largely offset by ongoing solid performance across other end markets." It added: "The Company’s progress in its core North American market has been impressive amid industry conditions that, while improving, remain below historical norms. The strong results of GM’s North American operations (GMNA) incorporate higher volumes and firmer pricing that are not only a function of moderately improving industry conditions, but also reflect GM’s success in introducing new vehicle models, most of which have been well received in the marketplace and are attaining higher pricing and segment share vis-à-vis their predecessors."
DBRS said new products such as the Chevrolet Malibu and Spark should significantly enhance GM’s profile across the small and medium car segments. Next year, the Company is planning several further product launches, including models derived from its next-generation pick-up and SUV platform, which should further bolster the segment’s already-solid profit margins.
While the agency is projecting U.S. industry sales will range between 14 million and 14.5 million vehicles this year, with moderate growth after that, GM is strong enough to weather another economic downturn and still stay profitable because of its much-improved cost position in North America.
DBRS said GM's geographic diversification, including China, is a strength, adding that a lackluster performance in South America is due to a relatively old product line and changing government policies that have affected trade patterns as well as access to foreign currency. GM is in the process of rolling out a more modern lineup in South America.
GM’s biggest challenge, the agency noted, is its European segment, which has been losing money for years. While the company has taken some steps to cut production capacity and reduce costs, further restructuring is needed to restore profits.
Overall, however, GM's financial profile is strong, with $27 billion in net cash, and strong cash flow. While GM initially benefited by dumping many of its obligations in bankruptcy, DBRS said, "GM has proved successful in upholding its balance sheet (and even strengthening it considerably further)."
That doesn't sound to me like a company headed for bankruptcy.
