Earlier this month, General Motors Company bolstered its cash reserves by issuing $4 billion in unsecured notes “to aid in general corporate purposes” as the Detroit-based automaker contends with the operational challenges caused by the coronavirus pandemic. Those GM notes have now been rated by credit rating agency, Fitch Ratings.
Fitch measures its ratings based on the ability of the debtor’s – in this case, GM’s – ability to pay back the debt. The firm assigned GM’s senior unsecured notes a rating of BBB-, with a “Stable” rating outlook. BBB- represents a “Good” credit rating, slotting below the A “High credit quality” yet above the BB “Speculative” rung. Furthermore, Fitch describes the general BBB rating as indicating that “expectations of default risk are currently low” and that “capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.”
According to the Fitch Ratings note seen by GM Authority, the rating represents a slight downgrade from BBB. This downgrade was based on Fitch’s expectation that “the company’s credit profile will remain weak relative to its prior negative rating sensitivities for a prolonged period due to a likely extended period of macroeconomic weakness stemming from the coronavirus pandemic.”
Fitch’s scale consists of 11 rating levels, though each of those 11 also contains a few sub-ratings. From highest to lowest, the ratings are:
- AAA: highest credit quality
- AA: very high credit quality
- A: high credit quality
- BBB: good credit quality
- BB: speculative
- B: highly speculative
- CCC: substantial credit risk
- CC: very high levels of credit risk
- C: near default
- RD: restricted default
- D: default
For those who aren’t experts in corporate finances, an unsecured note is a loan that’s not secured by the issuer’s assets. Unsecured notes are similar to bonds, but typically offer a higher rate of return and have a few other structural differences.
The $4 billion in senior unsecured GM notes issued break into three categories:
- $1.0 billion of 5.40 percent notes due in 2023
- $2.0 billion of 6.125 percent notes due in 2025
- $1.0 billion of 6.80 percent notes due in 2027
The $4 billion in unsecured GM notes follows several other actions taken by the automaker to bolster its balance sheet and available credit. In late April, the Detroit-based automaker extended its $4 billion, 3-year credit line by $3.6 billion. Before that, in late March, GM drew down $16 billion from its available credit lines of the $16.5 billion available at the time. The automaker also extended its $2 billion, 364-day revolving credit line to April 2021, though that extension is earmarked for GM’s captive finance arm, GM Financial, which has a different cashflow structure and necessity compared to its parent.
Actions to bolster cash reserves all take place as the automaker’s vehicle production remains idled in North America as a result of the COVID-19 pandemic. The circumstance puts GM – along with most other automakers – in a very difficult financial position that see it burn through cash while bringing in significantly less revenue than normal. To minimize the impact, General Motors has implemented various austerity measures, including suspending its quarterly cash dividend on common stock as well as its voluntary share repurchase program. The General has also “taken other significant austerity measures to preserve near-term available cash,” such as deferring payments to employees. As of this writing, GM production is slated to restart on May 18th.
Most recently, GM reported a slight profit for the first quarter 2020. It was the only American automaker to do so, as Ford and FCA posted significant, billion-dollar losses. Results for the second quarter are expected to result in a loss.
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