S&P Lifts Outlook on General Motors (GM) to Positive; Ratings Unchanged

Standard & Poor's Ratings Services said that it has revised its outlook on Detroit-based automaker General Motors Co. (NYSE: GM) and its subsidiary General Motors Financial Co. Inc. (which we deem a core subsidiary) to positive from stable and affirmed its 'BBB-' ratings on both companies.

All of our other ratings on both companies are unchanged.

"The outlook revision reflects our belief that GM is well positioned to continue to improve the profitability of its regional operations over the next two years," said Standard & Poor's credit analyst Nishit Madlani. "We expect that the generally positive fundamentals in the global automotive industry will support steady profitability for the company in North America (EBIT margins of about 9%-10%) and improved profitability for its operations in Europe (break-even EBIT in 2016) and the Asia-Pacific region, which will more than offset its meaningful, albeit reduced, losses in South America."

The positive outlook on GM reflects the increased likelihood that we could upgrade the company over the next 12 months given its improved track record of operational execution and exceptionally strong credit metrics amidst the generally favorable conditions in the automotive market.

We could raise our ratings on GM in the next 12 months if the company sustains EBIT margins of 9%-10% in North America and improved its European EBIT margins while sustaining its automotive cash flows amidst pricing pressures in China. In order for us to upgrade GM, we would also expect the company to sustain its current strong credit measures, including a debt-to-EBITDA metric of less than 1.5x and a FOCF-to-debt ratio of 25%-40% amidst the generally supportive conditions in the automotive industry. We would also expect the company to maintain its current strong levels of liquidity at the automotive parent prior to the next downturn and ensure that GMF is profitable and continues to demonstrate underwriting standards that are consistent with an investment-grade rating.

We could revise our outlook on GM to stable if adverse competitive developments (such as excess inventory, increased incentive use, or unfavorable shifts in customer demand) reduced its profitability prospects below the company's regional targets and it appears likely that production volatility will weaken its FOCF-to-debt ratio below 25% on a sustained basis prior to the next industry downturn. If the auto industry were to face a modest downturn, we could lower our ratings on GM if we expected that its FOCF-to-debt ratio would drop below 15% or if its debt-to-EBITDA metric exceeded 3x or more and we did not anticipate that it would improve. We believe that GM will likely avoid a downgrade, even in this scenario, if it maintains at least $20 billion of automotive cash and we were confident that a turnaround was underway.

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