DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and Revolving Credit Facility rating of General Motors Company (GM or the Company) to BBB from BBB (high). Concurrently, DBRS Morningstar downgraded the Long-Term Issuer Rating and the Long-Term Senior Debt rating of General Motors Financial Company, Inc. (GM Financial) to BBB from BBB (high) and GM Financial’s Short-Term Issuer Rating and Short-Term Instruments rating to R-2 (middle) from R-2 (high). Additionally, DBRS Morningstar downgraded the rating of the Senior Unsecured Notes issued by General Motors Financial of Canada, Ltd to BBB from BBB (high). The trend on all ratings is Negative. The rating downgrades substantially reflect sizable challenges facing the Company (along with all its automotive peers) as a result of the global outbreak of the Coronavirus Disease (COVID-19). DBRS Morningstar notes that, pursuant to the moderate scenario outlined in its commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” initially dated April 22, 2020, and subsequently updated on June 1, 2020, GM’s financial risk assessment (FRA) and associated credit metrics will likely decline to levels no longer commensurate with the Company’s former ratings. With these rating actions, all ratings for GM and its subsidiaries are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.
DBRS Morningstar notes that, prior to the outbreak of coronavirus, the Company’s FRA was at strong levels (with credit metrics well within the “A” rating category) because of GM’s conservative financial policy and solid operating performance in recent years. However, the impact of coronavirus has significantly altered the Company’s near-term trajectory. GM, as with several automotive original equipment manufacturers (OEMs), was initially affected by the outbreak primarily in China at the beginning of the year. Subsequently, in mid-March, the Company’s industrial activities in North America (as well as several other smaller jurisdictions) were rapidly shut down when the global spread of the pandemic increased substantially.
In line with the trajectory of the pandemic, GM’s Q1 earnings were correspondingly weak. EBIT-adjusted (as indicated by the Company) declined to $1.2 billion for the period (compared with $2.3 billion generated in Q1 2019), with GM indicating that coronavirus negatively affected EBIT by approximately $1.4 billion. Moreover, DBRS Morningstar expects GM’s use of cash will be sizable; the initial level of cash burn being exacerbated by negative working capital effects, which primarily consist of ongoing payments to suppliers notwithstanding the stoppage of production. (The Company’s rate of cash burn moderates considerably following the effective runoff of such payables.)
Consistent with its industrial peers, GM has implemented several countermeasures in response to coronavirus, including reductions in operating expenses, salary deferrals and cutbacks, short-term layoffs, and decreases/deferments in nonessential capital expenditures. DBRS Morningstar notes that GM has also taken a number of meaningful and proactive actions to bolster its cash position in response to the pandemic. These actions include the suspension of share repurchases and dividend payments (the latter in recent years averaging approximately $2.3 billion annually), drawdowns from its revolving credit facilities of $16 billion (as well as extensions of its three-year and 364-day facilities, the latter exclusive for GM Financial, and a new $2 billion 364-day facility for GM’s automotive operations), and unsecured note issuances in an aggregate amount of $4 billion. As a result of these measures, notwithstanding the decline in earnings and sizable cash burn stemming from coronavirus, DBRS Morningstar deems GM’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.
DBRS Morningstar also notes that, barring a meaningful subsequent wave of the pandemic, the worst of coronavirus appears to be over. The Company restarted Chinese production in February, although GM delayed opening its Wuhan facilities until late March. Additionally, in recent months, automotive industry sales in China have been trending positively (albeit from lacklustre levels), with the China Association of Automobile Manufacturers indicating that monthly sales in April and May 2020 improved by 4.4% and 14.5%, respectively (relative to the similar prior-year periods), ending an extended decline in sales of close to two years. Somewhat similarly, in North America, the Company restarted production in most facilities on May 18, 2020. The North American production has progressed rather well, with GM estimating it could possibly attain full production levels by the end of June (although this could be negatively affected by coronavirus-related challenges in Mexico). Additionally, regional sales have proven somewhat resilient as, following a decline in monthly sales of more than 50% in April 2020, U.S. sales in May were estimated to be down by roughly 30% (as indicated by Cox Automotive; in both cases compared with the similar prior-year period), with the trend in June remaining favourable and thus far suggesting a considerably more moderate decline vis-à-vis 2019 levels. Moreover, DBRS Morningstar notes that the proportionate sales of pickup trucks and large utilities have increased, further benefitting the OEMs given the higher contribution margins of such vehicles.
Consistent with the Negative trend on the ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of coronavirus, DBRS Morningstar notes that a further progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) could result in additional downward rating pressures. Conversely, should the worst effects of coronavirus be significantly contained through the first half of 2020 and followed by a meaningful recovery in the remainder of the year, the trend on the ratings could be changed to Stable.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577