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Delphi's Woes Take GM Down a Notch

Standard & Poor's Ratings Services lowered its long-term corporate credit rating on General Motors (GM) on Oct. 10, to BB- from BB, and its short-term corporate credit rating to B-2, from B-1. These ratings remain on CreditWatch, where they appeared on Oct. 3. with negative implications.

Consolidated debt outstanding totaled $284 billion on June 30, 2005.

"The downgrade follows Delphi Corp.'s bankruptcy filing, repercussions of which could impede GM's efforts to turn around its ailing North American automotive operations," says S&P's credit analyst Scott Sprinzen.

HEALTH-CARE FACTOR. GM will likely face demands from Delphi for price relief on components the carmaker sources from Delphi. Absent such price concessions, GM's operations could be disrupted by actions on the part of Delphi to reject certain supply contracts with GM.

Furthermore, GM is exposed to the risk of supply disruptions caused by labor strife at Delphi, as Delphi seeks to downsize its workforce and reduce wage rates.

In addition, developments at Delphi could adversely affect GM's own labor relations, at a time when it continues to seek concessions from the UAW to reduce burdensome health-care costs. GM will likely have to assume a portion of Delphi's pension and retiree medical obligations -- obligations that GM has guaranteed.

The auto manufacturer may ultimately succeed in reducing its purchased materials costs as a result of Delphi's restructuring and GM's ability to transfer components sourcing to other suppliers -- however, any such saving would take a number of years to materialize, at best.

STORMS AND BRIGHT SPOTS. The continuing CreditWatch review reflects other concerns about the state of GM's North American business, amid sharply deteriorating product mix and sales volume -- and prospects for sever and persisting pricing pressure.

We believe soaring gasoline prices after hurricanes Katrina and Rita are leading to an accelerating decline in demand for SUVs. GM will soon launch a family of all-new midsize and large SUVs.

Given GM's disproportionate reliance on SUV-related earnings, its ability to return to meaningful profitability in its automotive business will heavily depend on the success of these new midsize models, despite GM's efforts to strengthen its product offerings in other segments.

The ratings of General Motors Acceptance Corp. and all GMAC-related entities, including Residential Capital Corp. (ResCap), remained unchanged. These ratings stay on CreditWatch, but the implications are changed from negative to developing, which means that the ratings could be raised or lowered.

SEPARATION TO COME? The potential for downgrades of GMAC and ResCap does not reflect deterioration in their operating performance or financial condition, but rather stems strictly from the downgrade of parent GM.

Possibility of upgrades 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 GM is facing.

From Standard & Poor's Ratings Services

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