SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report
(Date of earliest event reported) October 23, 2001
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GENERAL MOTORS CORPORATION
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(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 1-143 38-0572515
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
300 Renaissance Center, Detroit, Michigan 48265-3000
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (313)-556-5000
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ITEM 5. OTHER EVENTS
On October 23, 2001, Moody's Investors Service issued a news release
lowering the long-term and short-term ratings of General Motors Corporation (GM)
and confirming the long-term and short-term ratings of our financial services
subsidiary, General Motors Acceptance Corp. (GMAC). The release is as follows:
Approximately $100 Billion of Debt Securities Affected.
NEW YORK, October 23, 2001 -- Moody's Investors Service lowered the
long-term rating (from A2 to A3) and short-term ratings (from Prime-1 to
Prime-2) of General Motors Corporation (GM), and confirmed the A2 long-term and
Prime-1 short-term ratings of General Motors Acceptance Corporation. The rating
outlook for both companies is negative. These rating actions conclude a review
for possible downgrade that was initiated on August 17, 2001.
The downgrade of GM's rating reflects the erosion in the company's
longer-term competitive position in North America. This erosion stems from the
increasingly competitive environment in the high-margin U.S. SUV, light truck
and minivan markets, which accounts for the majority of GM's earnings and cash
flow. Moreover, the returns generated by GM's domestic car operations and its
international business have been chronically poor. In contrast, many of its
non-U.S. competitors have a stronger and more diversified earnings stream: they
earn acceptable returns on cars sold in the U.S.; they have a U.S. customer base
that is generally younger and more affluent than that of GM; they are entering
the lucrative U.S. truck, SUV and minivan markets; and, they also enjoy solid
profitability in their domestic markets.
This weakening in GM's competitive position is occurring as the U.S.
automobile market is entering a cyclical downturn that could be exacerbated by
the aftermath of the September 11th terrorist attacks. This will create a very
challenging near-term environment for the company, and will result in weak cash
generation and debt protection measures through 2002 and possibly into 2003. In
response, we expect that GM, similar to other U.S.-based automotive
manufacturers, may have to undertake a range of initiatives that will reduce
capacity and lower breakeven levels. The success of such initiatives would be
critical in GM's ability to generate an adequate rebound in financial
performance as the U.S automotive sector recovers.
Subsequent to past cyclical downturns, various restructuring and product
enhancement programs undertaken by GM, in combination with rising demand, have
enabled it to enjoy a robust recovery in earning, cash generation and debt
protection measures. GM's ability to successfully lay the groundwork for an
operational and financial recovery when the U.S. market picks up will be
critical to sustaining the current rating level and to avoiding additional
pressure on the A3 rating.
The negative outlook reflects the considerable uncertainty surrounding the
potential depth and duration of the current downturn, the scope of any
restructuring efforts that might ultimately be implemented by the company, and
the degree to which its financial performance will improve when demand recovers.
We expect that over the coming quarters, the likely severity of the U.S.
downturn, as well as GM's ability to resize its operating structure, will become
clearer.
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During this period, Moody's will have an opportunity to more precisely
assess the timing and magnitude of the cash costs associated with the full range
of any initiatives undertaken by GM, the impact that these efforts will have on
the company's fixed cost position and break-even levels, and the degree to which
the company can lay an effective foundation for strengthening its financial
performance beyond 2002. Important considerations in assessing this foundation
will include: 1) GM's ability to lower its fixed cost structure, consolidate
platforms, and achieve additional efficiencies in both its supplier and dealer
networks; and 2) the market share, pricing and industry-shipment assumptions
that are the back drop for GM's future operating model.
Moody's believes that several factors will materially increase the
challenges that GM faces in any attempt to restructure its operating model,
contend with lower demand, and preserve a competitive position in its key
markets. These factors include: 1) the erosion in financial flexibility
attendant to the significant decline in the value of GM's ownership in Hughes
Electronics; 2) the long-term challenge of re-invigorating the Cadillac and Saab
brands in an increasingly competitive luxury car segment; and 3) the need to
establish a more competitive brand image for its broad line of domestic
automobiles.
The confirmation of GMAC's ratings is based on the company's sound
operating and financial position, the high quality and liquidity of its assets,
the importance of its auto finance operations to GM, and the relatively stronger
position of the finance company's creditors vis-a-vis the parent's. The finance
subsidiary's ratings are closely linked with GM's given the interrelationship
and business ties between the two companies; and most rating movements for GM
would produce a corresponding movement in GMAC's ratings. Yet Moody's expects
GMAC to remain positioned to operate as a prudent finance company, with more
stable business metrics through economic cycles. Moody's believes that these
finance company characteristics present an incrementally better credit
proposition for debt investors than do the parent's, and the one-notch rating
differential reflects this conclusion.
Moody's believes that GMAC is a well-managed, technologically
sophisticated finance company. The company has operated with sound levels of
alternative liquidity to support both its debt-paying ability and its ongoing
business operations through market stresses, and is well-positioned today.
Short-term debt levels have declined materially through 2001, with the finance
company making greater use of the long-term unsecured markets, as well as the
structured finance markets. One consequence is a vastly increased level of bank
line coverage of outstanding commercial paper.
Moody's also noted that weakness in the auto market, and the economy
generally, will continue to be adverse credit factors: borrower performance is
weakening, GM's new car volumes and pricing are facing pressure, and the
residual valuations on off-lease vehicles are under stress. Yet Moody's believes
that GMAC's underwriting, pricing and credit reserve policies, as well as its
solid capital levels, provide appropriate protection against auto market
cyclicality.
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Moody's also indicated that GMAC's mortgage and ancillary businesses have
become solid contributors to GMAC's income stream, and add a level of diversity
to the business. GMAC has a substantial market presence in both the residential
and commercial mortgage sectors. Each of these sectors could also prove
cyclical, with residential mortgage performance proving sensitive to prevailing
interest rates.
GMAC's overall position is strongly influenced by its multifaceted
relationship with GM, and by mortgage market dynamics. GM's new car sales volume
directly influences GMAC's origination volumes, and car quality and pricing
influence lease residual valuations. The parent's marketing policies influence
the loan-versus-lease decision and borrower quality, with deep incentives
attracting higher-quality borrowers. Also, GM may become an obligor to GMAC from
time-to-time in respect of intercompany dealings, although such transactions are
not material in size.
Nonetheless, Moody's believes that the position of GMAC's debt holders is
and will remain incrementally stronger than that of GM's creditors. The rating
agency concluded that GMAC's debt and equity constituents are both motivated to
ensure that the company maintains sufficiently prudent financial metrics,
operating standards, and asset quality measures to continue its auto finance
operations through any range of stresses. GMAC's auto finance operations provide
exceptional services to GM by ensuring that financing is available to its
dealers and targeted retail customers, even through economic stresses, and by
serving as a customer relations link. In this regard, the highly liquid nature
of prime auto finance loans, including a deep securitization market, provides
flexibility for the finance company to provide these services, even through a
difficult environment, if it continues to operate prudently. These strong
economic motivations for GM and GMAC drive Moody's to believe that the current
protocols of intercompany independence will be broadly maintained.
Moody's long-term debt ratings are opinions about the likelihood of
default as well as recovery or loss upon default. In light of its expectations
as to GMAC's ongoing operations, the rating agency indicated that the superior
recovery prospects for the finance company creditors, although unlikely to be
tested, warrants a single notch rating differential from the manufacturing
parent.
General Motors Corporation, headquartered in Detroit, Michigan, is the
world's largest producer of cars and light trucks. GMAC, a wholly-owned
subsidiary of GM, provides retail and wholesale financing in support of GM's
automotive operations and is one of the worlds largest non-bank financial
institutions.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GENERAL MOTORS CORPORATION
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(Registrant)
Date October 24, 2001
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By
/s/Peter R. Bible
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(Peter R. Bible,
Chief Accounting Officer)
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