GM CEO Mary Barra on the cover of the latest issue of Mary Barra.
Despite the recall of more nearly 30 million vehicles in the U.S. this year, concerns about subprime lending and a lackluster showing in the stock market, Standard & Poors has given GM a much-needed endorsement, raising the company’s credit rating to investment grade.
The announcement comes at a welcome moment for GM, which has watched its share price slide 20% since the beginning of the year, even while the S&P 500 has gained 20%. It also coincides with a generally positive cover story in Time magazine featuring CEO Mary Barra.
Despite taking some serious hits in recent months, the ratings agency focused on the positive side, among other things, citing the progress of GM’s European turnaround plan, which could put the company back on a breakeven level after losing money for the past 15 years. S&P also noted the automaker’s healthy cash flow and the limited reputational and market share damage from what has become a record number of recalls.
According to S&P analysts, GM’ ratings outlook is stable, which is in line with the agency’s overall outlook for the U.S. economy.
(Click Here for a review of the all-new Chevrolet Colorado and GMC Canyon midsize pickups.)
The news might come as a surprise to some observers, especially in light of the flurry of nearly 70 recalls GM has announced since the beginning of the year. The maker has estimated it will take at least a $1.8 billion hit for legal fees, repair costs and other expenses. And that doesn’t include the potential fines it could face if, for one thing, the U.S. Justice Department decides to bring criminal charges in connection with a decade-long delay of an ignition switch recall now linked to at least 21 deaths.
“We wanted to understand the impact of the recalls from a reputational standpoint as well as the effect they might have on the market share,” said Nishit Madlani, an analyst at S&P. “The company’s performance over recent months has shown that recalls haven’t impacted sales. Reputational damage did not transpire, for the most part,” he added.
(Victims’ compensation fund chief raises to at least 21 total deaths linked to ignition switch recall defect. Click Here for the latest.)
Former General Motors Chairman and CEO Dan Akerson had listed as one of his top priorities the return of an investment grade rating for GM debt. The maker last year got that from one of the market’s smaller ratings agencies, but the announcement by Standard & Poors is likely to have a far greater impact on the market.
The upgrade also marks a milestone in GM’s recovery from the structured bankruptcy five years ago that allowed the company to eliminate billions of dollars in financial obligations, which it could no longer pay. The obligations rendered shares of what came to be known as “Old GM,” worthless and eliminated GM’s debts to bondholders and contractors.
The bankruptcy also eliminated pension obligations, long-term leases on property and legal obligations to a variety of plaintiffs, including a number of people who have claimed they were injured by defective GM products.
As a result of the 2009 bankruptcy, GM was dropped from standard indices of the American economy, including the S&P 500 and the Dow Jones Industrial Average. GM has now been restored to both indices.
The new GM corporate and GM Financial credit rating is BBB-, which is one level higher than the previous GM rating of BB+, which S&P assigned in September 2011. In September 2013, S&P revised GM’s outlook from “stable” to “positive.” GM Financial’s previous rating was BB.
“Delivering segment-leading vehicles, improving the efficiency of our operations and building a fortress balance sheet made this upgrade possible,” GM CEO Mary Barra said, responding to the S&P upgrade. “While we are not yet satisfied, and know we have work to do, I am confident that our renewed focus on our customers will drive even stronger business results.”
(Big changes at Cadillac aimed at restoring brand’s luster — and profits. Click Here for more on Caddy’s upcoming CT6 premium flagship.)
Barra will meet with investors at the annual Global Business Conference on October 1 when GM plans to share more details about its near-term business targets and long-term strategic plans.
The S&P upgrade came a day before the official release of the latest Time magazine, the cover featuring CEO Barra, described as “The Mechanic,” who is working to “fix General Motors.”
(Paul A. Eisenstein contributed to this report.)