Capital Markets

GM Seeks Separate Rating for GMAC

The automaker may also reportedly pay more to renew its credit line next month.
Stephen TaubMay 12, 2005

General Motors Corp., whose debt was downgraded to junk status by Standard & Poor’s earlier this month, announced that it would like to separate its rating from that of its finance unit, General Motors Acceptance Corp.

Only Moody’s and Dominion Bond Rating Service assign a different credit rating to GMAC than to GM, the company noted in a Securities and Exchange Commission filing. The embattled automaker stated that the current ratings situation and outlook increases the risk for its long-term funding strategy and heightens the importance of improving its operating results.

Although the company stated that it is exploring actions that might help “mitigate the increased risk,” GM added that there would be no assurance that any such actions “would be successful in achieving a “split” rating from other rating agencies.”

Meanwhile, GM has a $4.55 billion credit line with JPMorgan Chase & Co. and Bank of America Corp. that is due to expire next month, according to Bloomberg, and the automaker may wind up paying more to renew it.

GM, which is rated BB by Standard & Poor’s, pays a fee of 15 basis points to keep the bank line available — less than one-third the price that other companies with the same S&P rating pay on similar deals, the wire service observed. If the company were charged 50 basis points, the average for BB-rated companies, its cost to keep the bank line would more than triple, to $22.8 million per year from $6.8 million, reported Bloomberg.

In addition, BB-rated companies typically pay about 180 basis points more than benchmark interest rates for their credit lines, according to Bloomberg, citing the rating company’s data. It adds that under GM’s current credit line, it would pay 77 basis points.

“Their interest costs will definitely rise” on any new loans, Efraim Levy, an S&P equity analyst, told the wire service. “The market has already priced that into the bonds.”