General Motors (MTLQQ), or GM, has received a credit rating for the first time since being under bankruptcy protection last year. The automaker was given an initial issuer default rating of BB-, a junk-level credit rating, by Fitch Ratings.
The credit rating was based on the automaker’s strong liquidity, better cost structure and competitive lineups. In fact, the same rating was assigned to GM’s hometown rival, Ford Motor Co. (F).
However, GM and Ford have taken relatively different paths to the same rating. GM has lower net debt and higher pension obligations. However, Ford experiences a completely reverse situation.
In 2009, GM’s pension obligations were under-funded by $27 billion while Ford’s pension obligations were under-funded by only $6.1 billion. On the other hand, in the first half of the year, GM had $8.2 billion in debt and $32 billion in cash while Ford had about $27 billion in debt and $22 billion in cash that had been generated from its automotive operations.
GM’s re-entry into the purview of credit ratings may favorably impact its upcoming initial public offering (IPO). In August, GM filed the first batch of paperwork required to hold an IPO, tentatively scheduled for mid-November. The IPO will value up to $8 billion–$10 billion.
The company will sell preferred shares, the proceeds from which will be utilized for repaying the government loans as well as for general business purposes. The IPO will also allow the stakeholders of the company to sell their stakes. However, no dividend will be paid on the common shares.
Post bankruptcy, GM has been primarily owned by the U.S. government (61% stake) and Canada government (11.7%), and by a trust fund providing medical benefits to United Auto Workers (UAW) retirees (17.5%). The rest of the ownership went to the bondholders of the old GM.
In exchange of the ownerships, GM received $52 billion in U.S. Treasury (“UST”) loans and C$1.5 billion ($1.5 billion) in Export Development Canada (“EDC”) loans. In April this year, GM repaid $8.1 billion in loans to the governments of U.S. and Canada, ahead of the scheduled maturity date of July 2015. The repaid amount constituted $6.7 billion in UST loans as well as $1.4 billion in EDC loans that it had received last year.
GM intends to repay the remaining $45.3 billion to the U.S. government and $8.1 billion to the governments of Canada and Ontario through the IPO. Although the IPO will allow the UST to begin selling the 61% stake it holds, GM clearly stated that UST would continue to own a substantial interest in the automaker following the IPO.
The government may not be able to sell all its shares at once. It will, rather, spread sales across a period of two years to make the most of the rising share prices.
GM’s share price is expected to rise with the improvement in its sales and finances and recovery in the auto market. In the second quarter of the year, the automaker recorded a profit of $1.3 billion or $2.55 per share compared to a loss of 12.9 billion or $21.12 per share in the same quarter of 2009, when the automaker was in the midst of bankruptcy filing.
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