GM credit rating upgraded to investment grade by Moody’s

GM credit rating upgraded to investment grade by Moody’s
Mike Colias
Automotive News | September 23, 2013 – 9:18 am EST
— UPDATED: 9/23/13 11:44 am ET – adds link
DETROIT — General Motors’ corporate debt has an investment-grade rating for the first time since 2005, a key milestone in GM’s comeback from bankruptcy.

Moody’s Investors Service today raised GM’s rating to Baa3 — its lowest level of investment grade — from Ba1. The credit-rating firm cited GM’s quality new product introductions in the United States, its strong market position in China and management’s commitment to maintaining a strong balance sheet.

GM also said today that it will buy back 120 million of its preferred shares from the UAW’s retiree health care trust, or VEBA, for about $3.2 billion.

“Good things happen when you build great cars and trucks and deliver strong financial results,” GM CEO Dan Akerson said in a statement. “Today’s news from Moody’s further underscores that this is exactly what we are doing today.”

Bruce Clark, a senior vice president at Moody’s, lauded GM’s “steadily improving operational and financial trajectory.”

“We think that the disciplines the company has embraced, combined with the strength of its U.S. product portfolio and a healthy domestic market, will enable it to stay on that path,” Clark said in a statement.

The other two major ratings agencies — Standard & Poor’s and Fitch — both have junk-status ratings on GM’s corporate debt, although both agencies in recent weeks raised their outlooks for the company to positive, from stable.

Moody’s said that GM’s rating could improve further if it strengthens its profit margin in North America and shores up its losses in Europe. It cited the possibility of aggressive pricing by Japanese rivals amid the decline in the value of the yen as a key risk.

VEBA deal

The agreement with the UAW trust is contingent upon GM closing an offering of senior unsecured notes that it’s starting today, the automaker said in a statement.

The deal, along with U.S. and Canadian governments’ efforts to reduce their ownership of the automaker, marks the latest move to pay back stakeholders in the 2009 restructuring.

GM has been paying a 9 percent annual interest rate on the preferred shares held by the union trust and the new debt would presumably be at a cheaper interest rate. GM didn’t specify how much new debt it was seeking in the market. It plans to offer five-, 10- and 30-year notes.

Replacing the trust’s preferred shares with new bonds is essentially refinancing GM’s debt at less cost, Joseph Phillippi, principal of consulting firm AutoTrends Inc. in Andover, N.J., said in a telephone interview.

The new offering would mark GM’s first unsecured offering since emerging from bankruptcy, the automaker said in an e-mail.

The UAW retiree trust currently holds 260 million shares. GM said it expects to record costs of about $800 million in the third quarter because of the transaction. GM has the ability to call the remaining preferred shares at the end of next year. The trust acquired the shares as part of the 2009 bailout.

Stock sales

The U.S. Treasury Department has reduced its stake in the automaker to 7.3 percent as part of a program to sell all of its shares as soon as this year. The Treasury’s stake is down from 32 percent in December when the government announced it was selling $5.5 billion of its stock back to GM and planning to sell the rest on the market within 15 months.

The U.S. said this month in a report it had recovered $35.4 billion of $51 billion invested in GM. With the remaining stake worth about $3.8 billion, the U.S. would probably lose about $11.8 billion.

Canada is also looking to exit its ownership in GM. The Canadian and Ontario governments earlier this month agreed to sell 30 million GM shares worth about $1.1 billion to Bank of America Corp. and Royal Bank of Canada in a block trade, reducing their stake by 21 percent to 110 million shares.

The governments are exiting GM as investor confidence has risen while the company introduces 18 new or redesigned vehicles in the U.S., transforming its lineup into one of the freshest in the industry from the one of the oldest. The restructured company held its initial public offering in 2010 at $33 a share.

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