Fitch Affirms IDR at 'B' & Removes GM from Watch Negative; Outlook Negative

Business Wire, July 12, 2007

CHICAGO -- Fitch has affirmed General Motors' (GM) Issuer Default Rating (IDR) at 'B' and removed the company from Rating Watch Negative (where it was placed on Nov. 5, 2005) following the ratification of the new UAW contract with Delphi. The ratification reduces the risk of any production disruption from a Delphi work stoppage that could have resulted in rapid and widespread production shutdowns at GM. The amount and range of financial support provided by GM, including absorption of health care and pension liabilities, worker flowbacks, buyout packages, ongoing wage subsidies and uncompetitive component prices from Delphi will remain a financial burden for GM over the intermediate term and slow its ability to reduce supplier costs. GM's extensive efforts and financial support to resolve the situation will now allow GM and the UAW to focus on the issues of the upcoming contract talks.

The Negative Outlook reflects the continuing pressure on GM's operating profile from competitive and market factors, and the difficulty that GM will have in reversing negative cash flows in North America over the near term. Despite a string of successful product introductions in the pickup and large SUV segments, GM's price point has continued to trend up while the market has continued to trend toward smaller vehicles. Progress in GM's smaller vehicles has been more limited, and GM maintains production of a number of products that are experiencing steady volume declines. A number of these products are assembled in plants that lack scale, adequate contribution margins, and competitive cost structures. Revenues at GM are expected to come under increased pressure in the second half of 2007 and into 2008, as higher gas prices and a weak housing market continue to affect the large vehicle segments. Healthy volumes of current product offerings such as the Saturn Aura, Buick Enclave, GMC Acadia, as well as the pending Chevrolet Malibu and Cadillac CTS, will be challenged to offset volume declines in more dated products. Over the intermediate term, Fitch expects additional restructuring will be required to further rationalize plant capacity, overlapping products and brands, and structural costs, given the revenue declines expected through 2008.

Despite savings realized from the hourly-worker buyout program and the health care agreement with the UAW, GM's North American operations have been challenged to regain profitability. Given the company's revenue and cost pressures through 2008, efficiencies and other cost improvements of as much as $5 billion may be needed to stem cash drains at the company's North American operations. As a result, any agreement on an independent health care trust that would take over GM's UAW retiree health care liabilities will be insufficient to return GM's North American operations to positive cash flow. The loss of significant EBITDA from the sale of Allison Transmission, the costs associated with the Delphi agreement, the potential reduction in investment income following any health care deal and further restructuring costs will continue to offset improvements from recent and ongoing restructuring moves. GM has made progress in reducing its fixed cost structure, but a large portion of the savings to date has come from non-cash expenses, with the cash benefits accruing only over an extended timeframe. Over the longer term, re-alignment of the company's product portfolio, efficiencies from material savings, and lower supply costs will be necessary to achieve sustainable long-term operating margins. From a product perspective, the Detroit 3 appear well-positioned to maintain their competitive position in the pickup market, and although it is a shrinking segment, GM is expected to continue its strong leadership position in the highly profitable large SUV segment.

The upcoming talks will be pivotal in determining GM's ability to establish a competitive cost structure. In addition to retiree health care liabilities and health care for existing workers, labor outsourcing is expected to be a key focus. Efforts to reduce job classifications and loosen work rules could lead to greater opportunities to outsource non-production jobs to outside labor. With the extensive buyouts completed to date and continuing attrition from an aged workforce, the opportunity to outsource these functions through changes to work rules and job classifications could lead to an effective multi-tiered wage structure outside of UAW coverage, similar to what is occurring at Delphi. Success in this area could further ratchet down labor and benefit costs over the long term. Fitch views the potential for UAW wage reductions for existing workers as unlikely, given the relative parity of wages versus non-UAW transplants.

Liquidity at GM remains very strong, and will be further supplemented by the pending sale of its highly profitable Allison Transmission unit (with expected proceeds of $5.6 billion). The substantial asset sales that have been completed over the past several years have helped GM to finance its restructuring program, but have also reduced earnings capacity. A strong cash cushion positions GM to seek a resolution to its retiree health care liabilities, although the cost of any settlement is highly uncertain. A settlement could be viewed as positive, by transferring the risks of health care cost inflation to the UAW (a prerequisite in terms of GM's ability to finance a settlement). In the event that an agreement is reached, however, GM's liquidity would likely be substantially diminished during a period of restructuring and operating uncertainty and Fitch will focus on the sufficiency of GM's liquidity and the funding of such an agreement, if it materializes. L/T VEBA of $14.6 billion could reach as much as 50% of funding requirements. Liquidity will also benefit from the runoff of the lease portfolio retained following the sale of a 51% interest in GMAC, and GM's credit position continues to benefit from its holdings in GMAC.