The downgrade is the result of a laundry list of reasons that includes concerns about rising health care and pension costs. These escalating costs represent a substantial drag on GM’s earnings and cash flows, Fitch said in a news release.
Health care costs were of particular concern to Fitch due to GM’s position as the largest corporate provider of health care in the US, and is as such extremely exposed to the negative cost trends in this area. This exposure is not limited to merely active employees but is also more importantly reflected in GM’s retirees, which had their monthly premiums increased in January in a move by the company to recoup some of the costs (See GM Driving Retiree Health Care Costs Higher ).
Additionally, regarding the automaker’s pension costs, Fitch expects GM to contribute up to $15 billion over the next five years. Although GM is not required by ERISA to make any contributions until the 2006 calendar year, this does not alleviate GM from substantial requirements in the near-term as a failure to contribute would increase the contribution requirements beyond 2006. Given GM’s fiscal year 2002 US pension benefit payments of $6.5 billion, it is clear that GM will have to make additional contributions into the pension funds to improve its pension funded status, Fitch determined.
GM had previously estimated its pension costs would triple in 2003 to $3 billion, as stock market declines increased its pension underfunding to $19.3 billion in 2002. This came in addition to news that GM would be lowering its future pension assumptions from a 10% rate of return to 9% (See GM Reduces Forecast, Pension Return Rates ).
Fitch is not alone in its concern over GM’s credit worthiness. M oody’s Investor Service early this month cut the company’s credit ratings by one notch to Baa1, a medium grade, from A3, an upper medium grade – three levels above “junk”. Further, the same concerns over health care liabilities and pension funding led to Standard and Poor’s lowering the GM’s credit rating outlook to negative from stable (See Pension Problems Dent GM’s Credit Rating ).