CHICAGO--(BUSINESS WIRE)--Fitch Ratings does not expect General Motors Company's ('BB+'/Outlook Positive) current recalls to result in a ratings change. We believe the company's cash flow and cash position will allow it to weather these challenges. As of the latest recall announcement, the total estimated cost of the recalls announced in March and April swelled to $1.3 billion, while GM held $38 billion in liquidity at year end. However, over the long run, the recall may result in reputational damage that could result in a sales decline.
Although the expected cost of the recalls is significant, GM's existing liquidity and cash flow-generating potential provide sufficient financial flexibility to cover the costs and still maintain a strong liquidity position. As of year-end 2013, GM's automotive liquidity stood at $38 billion, including $28 billion in cash and cash equivalents and $10 billion of revolver availability.
In Fitch's view, the greatest negative outcome of the recalls could be on GM's reputation and increase the potential for sales to slip for an extended period. GM's U.S. sales in March 2013, the month in which the recalls were first announced, rose 4.1% year over year. That was a little below the overall market rise of 5.6%, but not out of line with other volume manufacturers, suggesting the sales impact has been muted so far.
Many of the recalled vehicles are older models that are out of production, which may help minimize the impact on current vehicle sales. Also, the very large number of recalls announced by other manufacturers in recent weeks, including Toyota and Nissan, may somewhat temper consumers' view of the GM recalls.
A large number of lawsuits, including class action suits, have been filed against GM related to the recalls. These could potentially drag on for years and create some additional risk for the company. As many involve prepetition claims, the situation is complex and will require GM to effectively balance its legal obligations with its reputation in the market. The lawsuits are also likely to force management to focus on rectifying legacy issues at a time when it needs to continue to move the company forward.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.