Fitch Downgrades General Motors to 'B-', Outlook Negative

Business Wire, June 25, 2008

CHICAGO & NEW YORK -- Fitch has downgraded the Issuer Default Rating (IDR) of General Motors Corporation (GM) to 'B-' from 'B', and assigned a Rating Outlook Negative. The downgrade results from weak economic conditions, the dramatic shift to fuel efficient vehicles and the resulting cash drains at GM that are expected to persist at lest through 2009. Fitch expects that cash drains in 2008 will exceed $10 billion, and that new financing activity will be required over the next 18 months to keep GM's cash position above the minimum comfort level of $12 - $14 billion.

GM's product portfolio remains misaligned with market demand, and the rapid shift to more fuel-efficient vehicles over the last several months has exacerbated GM's market position. As a result, ever-deeper restructuring will be required, and will need to be accomplished on an accelerated time frame. Recently announced production cuts will result in meaningful share and revenue declines in North America in 2008 and 2009, heightening the challenge and the urgency to drive down costs at a pace that exceeds revenue declines. International operations in China, Latin America and Eastern Europe continue to perform well, and to generate healthy excess cash flow, although persistently higher commodity costs will continue to impair margins globally through 2010.

Factors that could trigger a downgrade:

--Projections that show GM would dip below $15 billion in cash.

--Inability to refinance s/t maturities over the next 18 months.

--Expectations that North American gross margins continue to shrink into 2009.

--Material reversal in GM's overseas operating results.

--Indications that GMAC's access to cost-effective financing have diminished or if GM is required to provide material financial support to GMAC.

Macro-economic factors and the shift in consumer buying preferences have resulted in a severe drop in unit volumes among the domestic manufacturers, particularly in the more profitable segments. Although the weak construction market has produced a steep cyclical decline in pickup sales, industry unit volumes have moved outside of the range attributed solely to recessionary conditions in the housing market, confirming that a more permanent shift in market is taking place. A rebound in industry pickup sales would certainly benefit GM volumes and profitability at the time it occurs, but the impact is likely to be more muted and more distant than originally anticipated. The recent announcement that GM will close an additional four assembly plants was expected, but reflect the fact that lost volumes are permanent, limiting the potential cash flow capacity over the longer term.

GM has made material improvements in its cost structure, progress that will continue with an additional hourly workforce reduction of 19,000 employees by July 1. In 2010, GM will benefit from savings associated with the recent UAW healthcare agreement, and an eventual rebound in economic conditions. Supplier and labor issues, such as the recent American Axle strike, the continuing Delphi situation, and disputes with the UAW on local operating agreements have drained resources and deferred efficiency and productivity savings.

Of primary concern is continuing financial deterioration at GMAC due primarily to the turmoil in residential mortgage markets. This has necessitated additional financial support from GM in the form of capital injections and guarantees. While GMAC continues to work through issues in its residential mortgage business, Fitch believes that core automotive finance fundamentals are also showing weakness, and that these trends are expected to persist throughout 2008. While Fitch acknowledges GMAC's recent bank line restructuring, which should provide necessary near-term funding, Fitch is concerned that a sustained lack of liquidity, particularly in the securitization markets, may reduce GMAC's ability to provide financing for GM customers. In this scenario, the Issuer Default Rating of GM could be reviewed with an expectation of a downgrade to 'CCC'.

Entering 2008, Fitch anticipated that the rate of increase in commodity costs would slow, thereby allowing more of the company's restructuring actions to be realized. Instead, commodity prices increases have continued to escalate in steel, other metals, and a wide variety of inputs that are expected to continue in the short term. Over the longer term, these costs will have to be recouped at least in part through higher pricing, which will remain a challenge.

Fitch expects that cash drains in 2008 will exceed $10 billion prior to any capital raising, and negative cash flow will persist at least through 2009. Raising capital in excess of maturities over the next two years is probable, but to a very limited extent given the state of the capital markets, the company's financial position, limited availability of securitizable domestic assets and GM's market capitalization. GM also retains access to approximately $7 billion in revolving credit agreements. Fund-raising options include the likely extension of VEBA-related debt owed to the UAW, financing related to profitable and growing international operations, equity-related offerings and other modest asset-based financings.