General Motors (MTLQQ) has received the same corporate family rating of Ba2 as by Ford Motor Co. (F) from Moody’s Investors Service, the credit rating agency of Moody’s Corporation (MCO). The rating agency is optimistic about GM’s low cost structure and improved market position.
Moody’s affirmed the outlook on GM as stable, same as for Ford. It has also rated GM’s secured credit facility to Baa3, the lowest investment-grade level.
The rating agency raised Ford’s corporate family rating from B1 to Ba2, two notches below investment grade, based on its improved operating performance, competitive product portfolio and restructuring activities.
The rating agency has also raised Ford’s probability of default rating from Ba2 to B1 and senior unsecured ratings of Ford Motor Credit Company and related companies from Ba3 to Ba2.
Recently, Fitch Ratings agency had assigned the same initial issuer default rating of BB- (a junk-level credit rating) to both GM and Ford. GM received the rating for the first time after being under bankruptcy protection last year. The rating was based on the automaker’s strong liquidity, better cost structure and competitive lineups.
However, GM and Ford have taken relatively different paths to the same rating by Fitch. GM has lower net debt and higher pension obligations. However, Ford’s problems are just the opposite..
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. Further, the government may not be able to sell all its shares at once. It shall rather spread sales across a period of two years to make the most of rising share prices.
GM’s share price is expected to rise with the improvement in its sales and finances, along with 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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