THE WALL STREET
GM Frets Buyback Would Freeze Credit Rating
Prodded to Repurchase $8 Billion in Shares by Activists
General Motors worries an activist’s proposed buyback would
affect its costs of financing new car loans.
Christina Rogers and
Feb. 12, 2015 2:26 p.m. ET
Co. is weighing the potential impact on its
investment grade credit rating of a large stock repurchase proposed by
activist investor Harry Wilson and four hedge funds.
Mr. Wilson wants the nation’s largest auto maker to
complete an $8 billion share buyback by mid-2016, arguing GM needs to
better manage its $25 billion in cash. GM executives recently
disclosed a quarterly dividend increase, but privately worry that size
of an additional buyback would dent its balance sheet and jeopardize
its credit ratings.
Two ratings firms this week indicated the proposed
buyback could hurt GM’s current credit rating, which is one notch
above junk grade. The two left open the possibility of downgrades or
refusing to upgrade its rating depending on the outcome of discussions
with Mr. Wilson. Standard & Poor’s called Mr. Wilson’s activism
“detrimental to credit quality,” adding that an $8 billion share
repurchase could prompt it to reconsider its GM assessment.
“It is certainly a negative from a credit perspective,”
said Bruce Clark, a senior vice president at
Moody’s Investors Service , a
ratings firm. “It may limit the time frame and prospects for any
further improvement in the rating.”
A ratings freeze or drop would hamper access to
low-cost capital for GM’s lending arm, called GM Financial, a chief
concern for the company’s executives. Executives hope to boost GM
Financial’s earning power significantly by 2016, in the hopes of
having another steady profit source if U.S. auto sales begin falling
later in the decade.
A GM spokesman said the company’s targeted cash levels
of between $20 billion and $25 billion are consistent with its peers
and “it is important for the credit-rating firms that we keep that
level of liquidity.”
Directors must “find the right balance” between
returning cash to shareholders and what is needed “to sustain
long-term growth,” said a person familiar with GM.
Mr. Wilson believes GM, if it sticks to forecasts for
cash generation, eventually will have cash within its target of
between $20 billion and $25 billion, even with an $8 billion buyback
in the interim, according to people close to Mr. Wilson.
GM Financial was formed through a $3.5 billion
acquisition of subprime auto lender AmeriCredit Corp. While GM has no
immediate plans to take cash from the auto business to prop up the
growing lender, the credit ratings of the auto business and lending
arm are tethered.
The Cadillac CTS-V, introduced at the Detroit
auto show last month, is part of the auto maker’s effort to
boost its share of luxury-car sales.
Photo: Agence France-Presse/Getty Images
Mr. Wilson was a central figure in GM’s government-led
bankruptcy restructuring in 2009, working on behalf of the Obama
administration. He holds GM shares and represents four hedge funds
that collectively hold more than 34 million GM shares.
The Detroit auto maker’s focus on GM Financial has
sharpened since Chief Executive
Mary Barra took over a year ago.
Once a business mainly aimed at subprime buyers, GM Financial is
taking steps to take share from
Ally Financial and other lenders
offering loans and leases to car buyers.
GM sold control of Ally in 2006. The former GMAC had
significant subprime mortgage holdings, collapsed during the 2008-2009
financial crisis and re-emerged with a focus on auto finance.
S&P last September returned GM and GM Financial to its
BBB- investment grade rating; Moody’s gave the company a Baa 3
investment-grade rating in 2013. Both are one notch above junk grade.
Fitch Ratings still rates GM below investment grade.
Unlike banks, captive auto leasing units don’t have the
funding support of consumer deposits, so they are more reliant on the
capital markets for their lending activities. GM has $25 billion in
cash but has resisted past calls to return money to shareholders,
arguing it needs to sizable cash piles to weather any unexpected
downturns. GM is investing to build up its model lineup, increase the
fuel efficiency of its cars and remake its luxury Cadillac division.
“Ratings are important to all the [auto] manufacturers
largely because they have sizable captives that borrow lots of money,”
Moody’s Mr. Clark said. “Even a modest decrease in the costs of funds
can make a big difference.”
Christina Rogers at
email@example.com and Mike