Cars and Drivers

S&P Upgrades of GM in Danger

Source: General Motors Co.
Ratings agency Standard & Poor’s said in a credit FAQ late Thursday that while the 6 million vehicles recalled this year by General Motors Co. (NYSE: GM) will have no immediate impact on GM’s current positive credit rating the recall could delay an upgrade of GM’s credit to investment grade. A review for a possible upgrade to investment grade had been expected this year but S&P now says the the recalls “increase the likelihood that a potential upgrade could occur in 2015 rather than this year.”

GM has recalled some 2.6 million vehicles due to a defective ignition switch in a number of models made and sold between 2003 and 2011. Including all its other recalls to date in 2014, GM is bringing back more than 6 million vehicles and will take a first quarter charge against earnings of $1.3 billion for the ignitions switch debacle alone.

S&P noted:

[A]n upgrade to an investment-grade rating (‘BBB-‘ or higher) for GM would likely result from a favorable reassessment of the company’s business risk profile to “satisfactory” from “fair.” The ramifications from the recalls are an additional factor that we will consider in making this assessment.

The recalls themselves, while negative, do not prevent an upgrade to GM’s risk profile, but they “could hurt GM’s standing in the U.S. auto market, where it generates the bulk of its profits, and we are watching for any significant deterioration.”

This is a serious problem for GM. Does it offer more incentive pricing to keep the cars moving out the door and improving revenue at the expense of profits? Or does the company try to hold the line on profits, gambling that the hit to its “standing” won’t be too severe or last too long?

Our guess is that CEO Mary Barra’s campaign to revamp the company’s image will minimize the damage to sales and that GM will hold the line on profits as long as possible. Barra’s commitment to more transparency and quicker response has already trickled down to other carmakers, and if every carmaker’s doing it, the public will get the message and may even see GM as a leader.

But Friday’s been a little tough on GM. The shares are down about 2.9% at $32.35 in a 52-week range of $28.75 to $41.85. Shares dropped as much as 4% earlier in the afternoon.

ALSO READ: GM Recall Charges Now Up to $1.3 Billion

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