Fitch Ratings, one of the “Big Three” credit rating agencies along with Standard & Poor’s and Moody’s, upgraded its rating of GM and GM Financial to BBB from BBB-, indicating the credit agency believes GM has a low chance of default.
GM now has the middle ranking in Fitch’s “good credit quality” category, between BBB-, the lowest grade that is considered investment grade, and BBB+.
Fitch itself defines the BBB rating as showing “good prospects for ongoing viability.” In the analysis of GM accompanying its new rating, Fitch says it expects the automaker to have stronger margins, cash flow, and liquidity than it originally calculated. It bases this assessment on GM production becoming both larger and more stable as supply chain disruptions continue to end.
Fitch says GM has plenty of liquidity (cash and other liquid assets), while its debt remains low. The agency remarks that while the operating margin of GM – a measure of how efficiently the automaker is turning revenue into profit after expenses – is currently 4 percent, below 2022’s 5.6 percent, it expects margin to climb back closer to 5 percent as GM EVs based on Ultium technology become more profitable.
GM electric vehicles were featured several times in Fitch’s rating analysis. The agency expects GM’s capital expenditure, or capex, to be elevated for a few years as it invests in EV production capacity, including new Ultium Cells plants to manufacture Ultium batteries. However, capex will then normalize once GM has built the needed plants.
Fitch says GM is “well positioned” for the EV transition. It expects GM to be able to meet its goal of 1 million annual EV sales in the U.S. and China by 2025. The analysis also notes GM’s intention to re-enter the European market with its return spearheaded by EVs as a positive.
Notably, Fitch said that “the rollout of Ultium EVs has been hampered by issues with a supplier of automation equipment for battery module production.” However, it expects production of the GM Ultium-based vehicle lineup to grow exponentially as soon as the company manages to get its hands on the devices to automate the battery module manufacturing process.
With regards to the current tense contract negotiations with the United Auto Workers union or UAW, Fitch did not consider the negotiations to be enough of a threat to GM financial stability to alter its BBB rating upgrade.
Despite the possibility of a UAW bottleneck strike or other disruptions, Fitch believes GM has the resources to weather a strike without its financial viability being affected, noting the six-week 2019 strike did not merit a rating downgrade.
In conclusion, Fitch said GM has approximately the same financial stability, liquidity, and operational strength as other automakers that have a BBB rating. While The General’s heavy reliance on North American sales and near-absence from Europe are viewed as weaknesses by the rating agency, it also has some significant strengths.
Fitch said that GM has “a top five share in most of the markets where it operates” and its leading brands, Chevy and Cadillac, have a good variety of passenger and luxury vehicles available to sustain sales among its advantages.