Fitch: GM CDS Tighten as Recall Risks Fade, Confidence Grows

NEW YORK & CHICAGO & LONDON--(BUSINESS WIRE)-- Tightening in General Motors Company (GM) five-year credit default swap (CDS) spreads since the end of January underscores investor confidence in the automaker as recall risks fade, according to Fitch Ratings.

GM CDS spreads have fallen from January peaks and narrowed close to 9% over the course of the last week, according to Fitch Solutions. Spreads on five-year GM CDS are currently quoted at 133 basis points. The CDS move outperformed a 2% firming for the broader North American Consumer Goods CDS Index over the same period.

Fitch upgraded GM's issuer default rating (IDR) by one notch to 'BBB-' on June 18. The upgrade of GM's ratings reflects the ongoing fundamental improvement in the company's core business over the past several years. Fitch also has increased confidence that the company has the financial flexibility to navigate the remaining issues following last year's ignition-switch recalls while maintaining an investment-grade credit profile.

Volatility in CDS trading is common. Nevertheless, the trend is consistent with improving fundamentals. Compared with its position prior to the last recession, GM today has a much lower break-even level, stronger liquidity, lower leverage and a much more competitive global product lineup.

GM's leverage remains low for its rating category, despite its issuance of $2.5 billion in senior unsecured notes last fall and the company remains in a strong net cash position. Fitch expects the company's liquidity position to remain strong, especially given its $20 billion minimum automotive cash target.

Free cash flow (FCF) will be pressured in the near term by recall-related cash expenses, but over the longer term, Fitch expects FCF to grow on pricing improvements and operational efficiency.

GM remains one of the most globally diversified auto manufacturers, with a strong position in most major and emerging auto markets that helps shield it from region-specific weakness. The funded status of the company's pension plans declined somewhat in 2014 as interest rates fell, but it remains much stronger than it was prior to the last recession, and de-risking activities have made them less sensitive to changing interest rates. Overall, Fitch believes GM's operating profile and financial position are strong enough to allow the company to weather the industry cycle without jeopardizing its investment-grade status.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150624006198/en/

Fitch Ratings
Stephen Brown
Senior Director
Corporate Finance, Autos
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Source: Fitch Ratings

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