GMAC's red ink adds to GM woes
General Motors Corp.'s credit rating fell deeper into junk status as the
financial services company it partially owns posted a $2.5 billion
quarterly loss Thursday, a day before GM is to announce its own
"significant" quarterly losses and continued sales declines.
The move by Standard & Poor's Ratings Services reflect mounting cash
losses in the Detroit Big Three's North American automotive operations
and deteriorating conditions in the U.S. auto market, the agency said.
Ford Motor Co. and Chrysler LLC also were downgraded Thursday and are
battling high gas prices and plummeting sales, among other factors.
GM is responsible for paying about $1.2 billion of GMAC Financial
Services' loss because it owns 49 percent of the company. Cerberus
Capital Management LP owns the remaining 51 percent. That hit is
expected to have an effect on GM's bottom line when results are
released. GM has braced investors for a dismal earnings report, as well
as a continued decline in monthly sales. July sales results are
scheduled for release today and are on track for an auto market with the
lowest sales totals in 15 years.
Today's financial results come a week after Ford Motor Co. announced it
lost $8.7 billion in the second quarter, the largest in the automaker's
Analysts said GM will attribute its losses to a number of factors
including labor strikes, fallout from the 12-week American Axle &
Manufacturing Holdings Inc. walkout, the weak housing and financial
markets, issues with Delphi Corp.'s bankruptcy, cash flow problems and
charges for buyouts the company has offered to employees.
GMAC, once one of the automaker's greatest assets, only compounds the
losses GM's automotive business suffered in the second quarter, said Joe
Phillippi, principal of Auto Trends Consulting Inc. in Short Hills, N.J.
"The bigger problem is the after effects of the American Axle strike
along with a steep drop in dealer orders even for vehicles not affected
by the strike or other production cuts," he said.
GM is dealing with a consumer shift away from profitable pickups and
SUVs to more fuel-efficient -- and less profitable -- cars and
crossovers. GM's overall sales have fallen 16.3 percent in the first
half of the year.
That shift is affecting all three automakers and will complicate their
turnaround efforts, said Standard & Poor's credit analyst Robert Schulz.
"This will leave them more vulnerable to already adverse industry,
economic and credit market conditions," he said.
GM has responded by offering 17 models this year that get 30 miles per
gallon or more, including the Chevrolet Malibu, the 2008 North American
Car of the Year. It also is adding 47,000 cars and crossovers to its
production plan to better meet consumer demand.
And its investment bank is talking with several interested parties about
possibly selling its Hummer brand.
The bank hired by the automaker to gauge interest in Hummer has heard
from a number of potential suitors, GM spokesman Tom Wilkinson said
Thursday. The possibility of selling Hummer is one of several GM
restructuring announcements made this year.
On July 15, GM Chairman and CEO Rick Wagoner unveiled a series of
cost-cutting measures including white-collar job reductions, a
suspension of the dividend and cutting health care coverage for
Medicare-eligible salaried retirees designed to boost cash flow by $15
A month earlier, the automaker said it would close four truck plants in
North America by 2010, a move that likely would affect factories
supplying those plants.
On the production side, GM said this week it is cutting production of
117,000 vehicles -- bringing this year's totals to almost 300,000
vehicles -- by slashing shifts, slowing the rate of production at two
plants and additional temporary shutdowns at eight facilities.
GM officials said Wednesday that the company plans to eliminate about
5,000 salaried workers by year's end; the company had previously said it
would trim white-collar costs by more than 20 percent.
Despite the moves, the Standard & Poor's downgrade reflects that GM is
on pace to spend $16 billion in cash for its automotive business this
year, Schulz said.
"The second half of '08 we think is going to be much worse than the
first half," he said.
The second-quarter GMAC loss compares to a $293 million profit a year
ago, with the red ink in the Detroit-based firm's mortgage unit -- $1.86
billion -- more than doubling losses in the auto division and swallowing
profits from insurance and international auto finance business.
GMAC blamed the losses on declining vehicle sales, volatility in
mortgage and credit markets and low used-vehicle prices, pressures that
two days ago forced the company to say it was suspending leasing
incentives in Canada.
"While conditions such as higher fuel prices and weaker consumer credit
prove to be headwinds, we continue to aggressively manage through this
economic disruption to position GMAC for longer-term success," said GMAC
Chief Executive Officer Alvaro G. de Molina.
GMAC, like other finance arms, are struggling with declining volumes of
vehicle purchases, but are also finding it more difficult to access
funding in tight credit markets, Standard & Poor's Schulz said.
Making matters worse, finance arms are taking sizable losses on lease
turn-ins because the residual values for SUVs and trucks are falling,
meaning that the finance arms sell them for less than they anticipated
"Captive finance arms went from being profitable business units to loss
makers with the falling residual values," he said.
GMAC lost $717 million on auto financing in the second quarter compared
to a $395 million profit a year ago.
Its mortgage unit's loss ballooned from $254 million in the same time
period last year to $1.86 billion, while the insurance unit made $135
million, up $4 million from last year.
The company also took a $716 million impairment charge related to
declining vehicles sales and lower used-vehicle prices.