GM Chief Hopes to Return to Investment Grade Within Year
“There are things that will happen over the next year or so that will drive that decision,” Akerson said in an interview this week at Bloomberg’s New York headquarters. “I hope so, but I don’t know,” he replied when asked if GM will get an investment rating in 12 months.
Akerson, 63, who became CEO in September 2010 less than three months before GM’s initial public offering, has pushed for additional restructuring as he tries to increase GM’s profit margins, which lag behind Ford Motor Co. (F), Volkswagen AG (VOW) and Hyundai Motor Co.
The Detroit-based automaker, along with Ford, fell to junk status in 2005 as part of a slide that eventually included GM’s government-backed bankruptcy reorganization in 2009. Ford avoided bankruptcy, recorded a $20.2 billion profit last year and was returned to investment grade by Fitch Ratings in April. Ford’s net income included a $12.4 billion non-cash gain related to tax accounting.
GM, which earned a record profit in 2011 of $9.19 billion, will likely follow Ford to investment grade by one or more of the major credit-rating companies this year, Vince Foley, an industry analyst with Barclays Plc, said in a telephone interview.
“When you look at the balance sheet of this company and at some of the credit metrics, they’ve been investment grade for a year,” Foley said. “There aren’t many high-yield companies that I cover that are sitting on $31.5 billion in net cash.”
Akerson said a return to investment grade would be “symbolic,” calling it one measure of success.
‘Fortress Balance Sheet’
“I would like to have it,” he said. “But you say to yourself, ‘Is that the measure of success?’ It’s one aspect of it but if we do the other things really well -- if we develop great products, if we burnish our brands, which we’re really making progress on, if we maintain that fortress balance sheet - - it will come in time.”
While GM posted its ninth straight profitable quarter in the first three months of 2012, earnings were reduced by continued losses in Europe. Since 1999, GM has lost $16.4 billion in the region, which includes its Opel operations.
The automaker last year appeared on track to break even until November as Europe’s economy worsened. Akerson was part of the GM board that decided against selling the company’s German- based Opel unit in 2009.
Challenges in Europe
“The fact that GM and Ford are making money and generating cash in the U.S. is a mitigant to the Europe challenges. But for a higher rating, we’d have to think about how Europe plays out,” Robert Schulz, an analyst with Standard & Poor’s Rating Services, said in a telephone interview.
GM said today it will move production of the next version of Opel Astra to a plant in England, one of two factories that analysts had said was at jeopardy for shuttering, raising speculation that one in Germany will be closed.
“The wild cards, some of which are under GM’s control, some of which aren’t, are just what happens in Europe in terms of both the sales levels and the potential contagion coming out of Europe that affects the U.S. and Opel’s own situation there,” Schulz said.
Standard & Poor’s has GM at BB+, one level below investment grade. Moody’s Investors Service rates GM at Ba1, one step below investment grade, while Fitch has the automaker at BB, two steps into junk.
“When we look at General Motors from a number of different perspectives, they have a lot of investment-grade characteristics,” Bruce Clark, a New York-based analyst with Moody’s, said in a telephone interview. “The main question we will address in considering an investment-grade rating for GM is: If we go there, will that rating be sustainable?”
In addition to Europe, analysts, including Clark and Steve Brown, a Chicago-based analyst with Fitch, said they want to know how the automaker will handle its pension plans, which were underfunded by $25.4 billion at the end of 2011.
“The bankruptcy did a great job of getting the balance sheet in order but a lot of the work that’s going on at the company today is trying to get the operations to a point they’re comfortable that they can be profitable through the cycle,” Fitch’s Brown said in a telephone interview.
The U.S. Treasury Department sold 28 percent of GM at $33 a share in the IPO and still holds 32 percent of the common stock, acquired in the $50 billion bailout by the Obama administration. The U.S. wants to sell for at least the IPO price, people familiar with the matter have said.
GM slid 1.4 percent to $21.61 at the close in New York.
Foley, the Barclays analyst, said he doesn’t expect a huge difference in borrowing costs for GM after an upgrade.
“It’s a symbol, ‘We’re back,’” he said of an upgrade. “‘We’ve been through the worst financial crisis, we filed bankruptcy, and we changed our operations.’ Look, they are in a much better spot today than they were in anywhere around the bankruptcy.”
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