GM Lifted to Investment Grade While Buying UAW SharesTim Higgins
General Motors Co. was raised to investment grade for the first time in eight years and moved to continue paying back stakeholders from its 2009 bailout with plans to buy preferred shares held by a union health-care trust.
Moody’s Investors Service upgraded GM to Baa3 from Ba1 today, citing new models for the U.S. market, strength in China and what it calculates as $31 billion of cash, including credit facilities. It marks the first time the automaker has had an investment-grade rating since its predecessor lost the designation in 2005.
“GM has been on a steadily improving operational and financial trajectory since it emerged from bankruptcy,” Bruce Clark, senior vice president at Moody’s, said in a statement. “We think that the disciplines the company has embraced, combined with the strength of its U.S. product portfolio and a healthy domestic market, will enable it to stay on that path.”
GM, armed with some of its best vehicles in a generation, has benefited as U.S. industry sales of new cars and light trucks totaled 1.5 million in August, the most in one month since May 2007. The seasonally adjusted annualized selling pace exceeded 16 million for the first time since October 2007, signaling robust demand where GM is the leader with 18.1 percent market share.
GM said today it will purchase 120 million preferred shares held by the United Auto Workers retiree medical trust for about $3.2 billion, or $27 each. The deal is contingent on GM closing an offering of senior unsecured notes that it’s starting today, the Detroit-based automaker said in a statement. It’s the first unsecured borrowing by GM, separate from its finance subsidiary, since the 2009 bankruptcy.
GM intends to issue five-, 10- and 30-year securities to help it buy the shares from the union-retiree health-care trust, the company said. The bond sale may price tomorrow, according to a person with knowledge of the transaction who asked not to be named because terms aren’t set.
The deal, along with U.S. and Canadian governments’ efforts to reduce their ownership of the automaker, is the latest move to pay back stakeholders from its 2009 bankruptcy as the company’s position has improved dramatically.
GM rose 0.8 percent to $37.13 at the close in New York. The shares have surged 29 percent this year, outpacing the 19 percent increase for the Standard & Poor’s 500 Index.
Chief Executive Officer Dan Akerson is pushing GM toward several ambitious mid-decade goals, including increasing North American operating margins, stemming European losses and boosting sales in China.
“Good things happen when you build great cars and trucks and deliver strong financial results,” Akerson said in a statement. “Today’s news from Moody’s further underscores that this is exactly what we are doing.”
The company has been paying a 9 percent annual interest rate on the preferred shares held by the union trust and the new debt would presumably be at a cheaper interest rate. GM didn’t specify how much new debt it’s seeking.
GM Financial’s $750 million of 4.25 percent notes due May 2023, its longest maturity bonds outstanding, traded at 95.25 cents on the dollar to yield 4.87 percent in August, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those securities are ranked Ba3 at Moody’s and BB- by Standard & Poor’s.
Ford Motor Co. was returned to investment-grade status by Fitch in April 2012, by Moody’s in May 2012 and earlier this month by S&P.
Replacing the UAW trust’s preferred shares with new bonds is essentially refinancing GM’s debt at less cost, Joseph Phillippi, principal of consulting firm AutoTrends Inc. in Andover, New Jersey, said in a telephone interview.
“I’m sure they can save 200 or 300 basis points,” he said. One hundred basis points equals 1 percentage point.
The new offering would mark GM’s first unsecured offering since emerging from bankruptcy, the automaker said in an e-mail.
Dan Ammann, GM chief financial officer, had signaled the automaker’s desire to get out of paying the 9 percent interest on the preferred shares.
“That is a very, very expensive piece of paper,” Ammann said Jan. 15 during an investor presentation. “We’d quite like to get that out of the capital structure and you should assume that we’d be planning to do that at the first available option.”
The UAW medical trust currently holds 260 million shares. GM said it expects to record costs of about $800 million in the third quarter because of the transaction. GM has the ability to call the remaining preferred shares, issued as part of the 2009 bailout, at the end of next year for $25 apiece. At $27 per share, GM is paying the trust an 8 percent premium to speed up the transaction.
The trust, currently the largest holder of GM common stock, has 140 million of those shares, or about 10 percent, according to data compiled by Bloomberg.
GM’s efforts to repurchase the trust shares early “is a strong indication that management is very comfortable with the launch of the” new pickups “and the associated incremental profit,” Joseph Amaturo, an analyst with Buckingham Research Group, said today in a note to clients. GM redesigned its high-margin Chevrolet Silverado and GMC Sierra large trucks.
“Additionally, we believe management’s desire to fund the repurchase with issuance of unsecured debt is an indication that they want to keep a sizable gross cash balance that could be eventually used for the initiation of a dividend” or “traditional share repurchase.”
The U.S. Treasury Department has reduced its stake in the automaker to 7.3 percent as part of a program to sell all of its shares as soon as this year. The Treasury’s stake is down from 32 percent in December when the government announced it was selling $5.5 billion of its stock back to GM and planning to sell the rest on the market in 12 to 15 months.
The U.S. said this month in a report it had recovered $35.4 billion of $51 billion invested in GM. With the remaining stake worth about $3.8 billion, the U.S. would probably lose about $11.8 billion.
Canada is also looking to exit its ownership in GM. The Canadian and Ontario governments earlier this month agreed to sell 30 million GM shares worth about $1.1 billion to Bank of America Corp. and Royal Bank of Canada in a block trade, reducing their stake by 21 percent to 110 million shares.
The governments are exiting GM as investor confidence has risen while the company introduces 18 new or redesigned vehicles in the U.S., transforming its lineup into one of the freshest in the industry from the one of the oldest. The restructured company held its initial public offering in 2010 at $33 a share.
Light-vehicle sales in the U.S., where GM is the market leader, will probably rise to 16.1 million next year, the average estimate of 13 analysts surveyed by Bloomberg. That would be the most since 2007 and almost match that year’s total.
Moody’s said it expects the U.S auto sector to remain healthy, enabling GM to make progress in improving its North American margins.
“GM is entering a robust phase of its new product introduction cycle in North America, and market response has been positive,” Moody’s said in its statement.