By Nathan Bomey, Detroit Free Press –
DETROIT — General Motors received a credit rating upgrade from one of the three major ratings agencies Friday in a vote of confidence that the company has improved its financial standing and can weather challenges in Europe.
Fitch Ratings upgraded GM’s issuer default rating from BB to BB+ and said the outlook for the future is stable.
“Since exiting bankruptcy in 2009, GM has adhered to a strategy of maintaining a low level of automotive debt on its balance sheet, while also maintaining a high level of cash and credit facility availability,” Fitch said in a statement. “This has provided the company with substantial financial flexibility that would allow it to withstand a future auto industry downturn.”
The upgrade comes as GM is generating big profits in North America but facing steep losses in Europe, where consumers are conserving cash in the midst of a sovereign debt crisis. Overcapacity has prompted automakers to offer deep discounts on vehicles.
Fitch said GM has sufficient liquidity and profits to justify the upgrade, which can lower borrowing costs.
The agency pointed to GM’s $33 billion of automotive cash, cash equivalents and marketable securities at the end of the second quarter as a sign of stability.
“It’s one more clear sign that we’re moving the business in the right direction for long-term profitable growth,” GM spokesman Jim Cain said.
The automaker posted a global profit of $1.5 billion in the second quarter, down 41 percent from a year earlier but better than analysts expected. In North America, GM earned $1.965 billion, but in Europe it swung from a $102 million profit a year ago to a $361 million loss.
Barclays analyst Brian Johnson on Thursday projected GM Europe losses of $464 million in the third quarter and $442 million in the fourth quarter.
The company replaced at least four senior executives in Europe during the second quarter as the region’s economic crisis continued to discourage consumers from buying new cars. GM Vice Chairman Stephen Girsky took over temporary leadership of GM’s Adam Opel unit in Germany.
“European losses, in particular, continue to be a heavy drag on the company’s overall results, and it likely will be several years at least before the GM’s operations in the region contribute positively to the company’s bottom line,” Fitch said. “Management turnover has also been significant, which could complicate the process of restructuring.”
Fitch said another long-term challenge for GM is its pension obligations, which were underfunded by $25 billion at the end of 2011. Its U.S. pensions were underfunded by $14 billion at the end of the year.
Fitch estimated that GM’s underfunded U.S. pension obligations dropped to $13 billion after the company recently offered pension buyouts to 42,000 salaried retirees and shifted others to monthly annuity payments from Prudential.
GM has said it will consider a similar move for hourly workers, which would have to be negotiated with the UAW. But Fitch said the “cost to do so would be significantly higher.”
Standard & Poor’s currently rates GM at BB+ with a stable outlook, which means “we don’t see an upgrade” in the next year or so, S&P analyst Robert Schulz said in an interview.
In Europe, “there’s no easy near-term solution,” Schulz said.
He said the U.S. continues to be a bright spot for GM. If the U.S. auto sales market were to slip, that could present problems, but S&P is forecasting sales improvement for 2013. S&P projects industrywide light-vehicle sales of 14.8 million in 2013, up from a forecast of 14.1 million for 2012.