GM Driving Debt Proceeds To Pension Liabilities

June 20, 2003 ( - General Motors Corp. (GM) is issuing approximately $10 billion in debt securities and convertible debentures as the company seeks to close the holes in its underfunded US pension fund.

The world’s largest automaker, which earlier this month announced falling bond rates had added $6 billion to $8 billion to its retirement liabilities, said it expects almost all of the proceeds will be used over time to partially fund its pension funds and other retiree-benefit obligations. GM , whose pension plans were underfunded by $19.3 billion at the end of 2002, said it expects to make significant cash contributions to these funds by late 2003, according to a news release.

Contribution at the end of the year would come after GM contributed $5.8 billion to its US pension and retiree benefit plans during 2002 and another $1.2 billion in GM Class H common stock in 2003.   Overall, the company announced plans to contribute roughly $15 billion to its pension and retiree benefit plans by 2007.

Further, the company said equity-market improvements resulted in asset returns of about 9% for its pension plans year-to-date.   However, the discount rate used to measure liabilities for accounting purposes has declined about 75 to 100 basis points this year, resulting in increases to the unfunded portion of the liabilities.  GM had previously estimated its pension costs would triple in 2003 to $3 billion (See GM Reduces Forecast, Pension Return Rates).

The debt offerings are expected to include intermediate- and long-term debt in US dollars and euros, as well as US dollar debentures that are convertible into GM $1-2/3 par value common stock.   The Dow component said it believes the general cost of borrowing in US markets is at historic lows, and it is attempting to take advantage of the favorable capital markets environment.   With the move, GM effectively doubles its original balance-sheet-strengthening target for 2003 to $20 billion from $10 billion while increasing its near-term liquidity to more than $30 billion.