GM's Financial Clouds Darken

S&P Ratings says the automaker's restatement of 2002-06 is cause for worry, but for now, its credit rating stays put

General Motors' (GM; B/Negative/B-3) announcement that it is restating financial results from 2002 through the third quarter of 2006 raises new concerns about the integrity of the company's financial reporting and internal controls. But the news has no immediate effect on S&P's credit ratings on GM, GMAC, or GMAC's Residential Capital unit.

The accounting issues GM is working to resolve encompass several areas, including hedge accounting under accounting standard FAS 133 and accounting for deferred tax liabilities. In addition, GMAC has not yet finalized its financial statements for 2006, after it sold a majority stake in the finance unit to an investor group in November. GM still expects to file its 10-K by the Mar. 1, 2007, deadline.

CreditWatch Considerations

We do not believe these errors will affect cash and cash equivalents, which were $26.4 billion at the end of 2006. However, the ratings could be placed on CreditWatch with negative implications if GM were to miss the Mar. 1 filing date with the Securities & Exchange Commission, even with the brief and normally available extension period.

The heavy ongoing funding requirements of GMAC and ResCap add particular significance to the timely filing of financial statements. The ratings could also be placed on CreditWatch if additional serious concerns are uncovered or if there is any other material near-term effect on GM's liquidity, neither of which we currently anticipate.

As with the early 2006 restatement, this current restatement could raise issues regarding GM's access to its $4.48 billion revolving credit facility. At a minimum, GM, GMAC, and ResCap could have to seek waivers on financial reporting requirements from lenders. However, in contrast to the circumstances surrounding the 2006 restatement, GM's current bank revolving credit facility is secured, and lenders may be more inclined to provide accounting-related waivers.

Within the Scope

Other factors in the automaker's favor: The GMAC sale has closed, GM's cash position is larger, some progress has been made in the North American restructuring plan, and we believe that resolution of GM's operational and financial exposure to bankrupt former unit Delphi is well within the scope of GM's liquidity.

Still, the need to attend to these accounting issues adds to the various challenges that management continues to face on a number of nonoperating issues, including the Delphi situation.

GM still faces SEC investigations into certain accounting practices, including its pension and other post-employment benefits (OPEB) assumptions. These investigations remain concerns, although the magnitude of their effect is uncertain.

Prospects for GM's automotive operations remain clouded. The ratings could be lowered further if we come to expect that GM's substantial cash outflow would fail to moderate because of setbacks, whether GM-specific or stemming from market conditions.

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