Credit analyst says General Motors has no driving force to move upward

By Ronda Fears

Nashville, Jan. 21 - Carol Levenson, director of research at Gimme Credit, sees little room for upside in General Motors Corp. credit with several issues looming - Fiat, Hughes Electronics, cash flow and pension funding.

"You can't say General Motors (A3/BBB) didn't warn investors about the hit the company would take in 2002 as the result of its underfunded pension plans," Levenson said in a new report.

"Still, it was rather shocking to see the actual year-end balance sheet figures last week, with common equity reduced to a mere $6.8 billion after the $13.6 billion pension hit."

Since October, S&P downgraded the company, largely because of its growing pension and other post-retirement obligations, and GM contributed another $2.6 billion in cash to its pension fund.

There are also worries about cash and cash flow, she said.

GM management boasted of beating its "cash generation" target of $10 billion last year by raising nearly $12 billion in cash.

"This is somewhat misleading," Levenson said, "since it doesn't bear any resemblance to free cash flow and it counts $4.6 billion in debt issuance as "cash generation.

"By any traditional definition of free cash flow, GM's nonfinance operations generated a whopping $300 million for the year, and posted negative free cash flow of $1.8 billion in the fourth quarter."

Moreover, cash flow performance in the fourth quarter was substantially worse than the prior year, she said, despite the earnings improvement, noting most of the deterioration can be attributed to the cash contribution to the pension fund.

By GM's definition, the analyst said, cash exceeded its debt by $2.3 billion at year-end, although this cushion fell by $1 billion in the quarter.

By the traditional definition, however, she said non-finance net leverage increased from 10% to nearly 30% in the quarter.

"It should come as no surprise to anyone who picks up a newspaper or catches a car commercial on the tube that the company's 'net price retention' continues its downward slide, with the fourth quarter seeing a drop of 3.2% on top of a 1.5% decrease last year," Levenson said.

"Management remains mysterious about their plans with regard to Fiat and Hughes, both issues that could affect credit quality. We intend to watch cash and cash flow closely for signs of weakness, and we continue to see little upside in this name."

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