GM's Credit Woes Leave Lending Arm Exposed

[Guest Josh]

NEW YORK -(Dow Jones)- Deciphering Standard & Poor's ratings reports on General Motors Corp. (GM) is becoming more and more like reading Federal Reserve meeting minutes and speeches.

Just as bond investors examine the Fed's language with a fine-toothed comb to find the slightest hint of a change in the bank's interest-rate policy, so have investors picked over S&P analyst Scott Sprinzen's most recent report on General Motors. They're grasping for clues as to what might happen to the legendary auto maker and its financing arm General Motors Acceptance Corp. (GMA.XX) now that GM is mired in even more problems since auto supplier Delphi Corp. (DPH) filed for bankruptcy Saturday.

The question that everyone wants answered is: Will GM divorce itself enough from its financing arm so that GMAC can regain an investment-grade rating and protect itself from GM's liabilities if the auto maker filed for bankruptcy? GMAC needs an investment-grade rating to sustain its business over the longer term.

After Delphi's bankruptcy filing, S&P changed its tune about assigning matching ratings to GM, the parent, and subsidiary GMAC. It cut GM's ratings one notch to double-B-minus from double-B, but left GMAC's and its related units unchanged at double-B. S&P left GM's ratings on CreditWatch with negative implications, but changed the CreditWatch implications on GMAC's ratings to developing from negative - indicating that they could be moved up or down. "The potential for upgrades (of GMAC and residential mortgage business ResCap) depends on these entities achieving substantial separation from their parent -- through strategic actions that would alter the ownership and control of the subsidiaries. Such an outcome now seems more likely to occur, given the increased challenges that GM is facing," said the S&P report.

Sprinzen declined to comment further on the ratings action or on whether GM does have a plan to cut some of its chord with GMAC. But analysts across the credit markets believe that S&P's report indicates knowledge of some movement to separate - maybe sooner rather than later.

More: http://www.smartmoney.com/bn/ON/index.cfm?...012-000738-1505

It seems like a spin off could be coming pretty quickly.

Sprinzen declined to comment further on the ratings action or on whether GM does have a plan to cut some of its chord with GMAC. But analysts across the credit markets believe that S&P's report indicates knowledge of some movement to separate - maybe sooner rather than later.

[Member55]

Why don't they go public with GMAC but still keep a majority stake. How would that work out?

[Shantanu]

I'm not in favor of this. GMAC has been a source of financial stability to GM in bad times. Plus it makes sense for GM to have a big financial division, because they need to so much money in the bank at all times to pay off employees and suppliers (because cash receipts may not happen at the same time as cash outflows). That money is used productively through GMAC to make more money for GM.

[Ghost Dog]

GM's Delphi Costs Make Finance Stake Sale More Likely

http://www.bloomberg.com/apps/news?pid=100...=top_world_news

Interesting bit

GM already had $7.5 billion in unfunded pension

Gm says thier pensions are fully funded.
http://www.nytimes.com/2005/10/03/business...2277a58&ei=5070

The federal government contends that General Motors' pension fund is $31 billion short of what it owes its work force, according to closely held government data, a figure in stark contrast to G.M.'s assurances that its pension plans are "fully funded."

[Flybrian]

So...does this mean I don't have to make next month's payment?

[daves87rs]

I doubt it would happen. But it could.

[Newbiewar]

So if they do spin it off, what's the worst that could happen?

[post="27938"]<{POST_SNAPBACK}>[/post]

GM loses yet another advantage...

They must only play price wars...

you know if GM introduced 0% financing 72 months... the cars would fly off the dealership, and GM isnt losing a dime, where as the GMAC is taking a hit... GM would create another lending company if GMAC was spun off... but in all likelyhood if the two were to split, will be face down waiting for a kick in the back...

[SimonDavid]

It's clear that GM needs a finance arm The problem is that GMAC cannot function much longer if it is part of General Motors - because it is linked to GM's low credit rating and therefore cannot tap the capital markets for finance. GMAC is currently using every trick in the book to get around this - securitising its receivables, selling off some subsidiaries - but it's not viable long term. It is better for GM to own 40% of a viable GMAC than 100% of a dead duck.

[SimonDavid]

These are the key quotes :

By law, a company that is 80% or more owned by a parent is liable for the parent's pension liabilities and more

"If the goal of a separation is to push the cash flows and liquidity pools and high quality portfolios of GMAC away from the parent's potential grasp and the grasp of the UAW..., then the structural changes would be good for GMAC ratings, but very bad for GM-the-parent's base of financial support," said Glenn Reynolds, analyst at CreditSights, an independent fixed-income research firm in a report. "That would be interpreted as GM preparing for war."

So this is GM's game :

- Sell a significant share in GMAC to a "friendly" investor (his name probably starts with a K) thereby freeing it from GM's credit rating and ensuring that it can go on financing cars even though GM is in chapter 11

- In the process ensure that GMAC is no longer liable for its (former) parent's pension liabilities

- GM (but not GMAC)then declares chapter 11 - much easier to prove that it is insolvent as it no longer has GMAC's cashflows

- In chapter 11 GM dumps alot of its pensions on the government's PGC and screws down the UAW

- GM emerges from chapter 11 fully competitve and stripped of alot of legacy costs

- GMAC continues to finance and support GM's sales throughout the chapter 11 process, thereby ensuring the basic viability of the business and the dealers

[mrfunji]

I thought GM and GMAC were in junk status? This article says GM is BB- and GMAC is BB. I don't get all this financial lingo.

[SimonDavid]

Both BB- and BB are classed as "sub investment grade", colloquially referred to as "junk"

[FUTURE_OF_GM]

Yet another bid by one of GM's many enemies in the further destruction of GM.

The press and analysts WILL get what they want, a severed GMAC and a destroyed GM.

according to closely held government data,

Apparently not... The government seems to be leaking it's financial secrets to the press as bad as it leaks CIA information to foreign countries.