Could General Motors Get a Credit Boost Soon?

By Markets Fool.com

Moody's noted that GM was able to sustain a strong position in China last year. The hot-selling Buick Envision SUV helped that effort. Image source: General Motors

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What's happening: Credit-rating agency Moody's Investors Service said this week that the outlook for General Motors' credit rating, currently at the lowest tier of "investment grade," is "positive."

What that means: It means that GM could be getting a credit upgrade soon. An upgrade would likely allow GM to issue bonds and get financing at lower rates, helping CFO Chuck Stevens with his efforts to bring down GM's costs.

GM's credit rating is currently at the lowest tier of what is called "investment grade," meaning that institutional investors that are limited to owning only higher-quality debt have been able to buy GM's bonds, and that GM is already paying reasonable rates on its debt.

Moody's upgraded rival Ford this week after reviewing the Blue Oval's strong 2015 results, its fat cash position and low level of debt, and its improving operations outside of North America.

Broadly speaking, most of the arguments that Moody's made in favor of boosting Ford's rating apply to GM, too, hence the positive outlook. But it sounds like Moody's wants to see a little more progress from GM before giving it a boost.

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What Moody's said: "The positive outlook for GM reflects our expectation that the company will continue to strengthen its performance in North America and Europe, and that it will maintain a strong position in China," Moody's senior vice president Bruce Clark said in a statement. "In addition, we expect that the company will continue to make progress in building an operating structure that can contend with the risk inherent in the global automotive sector."

Moody's noted that GM's EBIT-adjusted margin of over 10% in North America and its continued strength in China represent "notable areas of progress." In the event of a downturn in auto sales in the U.S., Moody's estimates that even with its new U.S. labor deal, GM will break even or post a profit as long as it sells at least 2.3 million vehicles in North America in a year. GM sold 3.6 million vehicles in North America in 2015, 57% above that break-even level.

Moody's also noted that GM is making progress in funding its pension plans, which have been underfunded for years. The company is issuing bonds to fund a $2 billion contribution to its U.S. pension plan, which Moody's said will reduce GM's global pension underfunding to $19 billion.

It also noted that, like Ford, GM has a strong cash position. As of the end of 2015, the General had $20.3 billion in cash and another $12.2 billion in available credit lines, against just $8.8 billion in debt.

What happens next: Moody's said that it would consider "GM's capacity to contend with downside risk" as it weighs an upgrade for the General. It would also like to see GM sustain its strong profit margins in North America and China while returning its European unit to profitability, something that GM has said is likely in 2016.

For investors, Moody's note was a small but meaningful vote of confidence in CEO Mary Barra and her team. An upgrade would be a bigger vote of confidence, and we'll be watching for it.

The article Could General Motors Get a Credit Boost Soon? originally appeared on Fool.com.

John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.