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General Motors bonds extend rally as company boosts cash flow and EPS outlooks


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General Motors bonds extend rally as company boosts cash flow and EPS outlooks

Bonds backing General Motors Co. traded tighter after the automaker today followed on its dramatic business transformation announcement in November with the release of upbeat guidance for the year ahead. The company also disclosed that it plans to secure a $3 billion revolving credit facility "to fund immediate transformation costs and provide additional financial flexibility."

GM 5.95% bonds due April 1, 2049 — which the company placed at the holdco level in September 2018, at T+287.5, to prefund pension obligations — traded today at T+330, or 20 basis points tighter on the day and 35 bps tighter week to week. The 5% 10-year notes due Oct. 1, 2028, which were placed at T+210 as part of the same offering, traded 10-15 bps tighter this morning on either side of T+280, down from trades as wide as T+308 this week, trade data show.

GM five-year debt-protection costs slid 10%, tightening 17 bps to indications near 160 bps, according to Markit. That move lower extends a decline from 212 bps on Jan. 3 and marks the lowest reading since Nov. 12, when spreads inflected wider as broad-market credit sentiment turned unambiguously negative.

GM today disclosed that it now expects to post 2018 adjusted EPS and free cash flow, or FCF, above the guidance that it provided Oct. 3, and guided to further earnings growth in 2019. Its first pass at 2019 guidance is for adjusted EPS of $6.50-$7.00, and adjusted automotive free cash flow of between $4.5 billion-$6.0 billion (from $13.5 billion-$14.0 billion of automotive net cash provided by operating activities, less $8 billion-$9 billion of automotive capital expenditures).

GM's present BBB/Baa3/BBB ratings profile reflects stable outlooks on all sides. Fitch in September noted that it expected GM to generate automotive FCF after dividends of just under $2 billion in 2018, after capital expenditures of slightly less than $9 billion. Fitch said it viewed 2018 capex — versus $8.4 billion in 2017 — as representing "peak" spending associated with investments in a new full-size truck, as well as low-cost vehicles as part of its global emerging markets, or GEM, program.

Notably, GM expects total U.S. industry sales of about 17 million vehicles in 2019, suggesting only modest downside from approximately 17.3 million vehicles sold in 2018, despite what GM today characterized as a "declining car market.” In China, GM said it expects industry retail sales to hold in line with the nearly 27 million vehicles sold in 2018, “even with recent challenges faced by the industry and economy."

The automaker on Nov. 26 targeted a $1.5 billion reduction in its annual run-rate capital spending and $4.5 billion of cost reductions, including the shuttering of assembly plants in Oshawa (Ontario, Canada), Detroit (Detroit-Hamtramck Assembly), and Warren, Ohio (Lordstown Assembly); propulsion plants in White Marsh, Md. (Baltimore Operations), and Warren, Mich. (Warren Transmission Operations); and two additional facilities outside North America. GM planned to cut 15% of its salaried and salaried contract staff, including 25% of its executives.

"We are focused on strengthening our cash generation and creating efficiencies that will position us to take advantage of opportunities through the cycle,” CFO Dhivya Suryadevara said in today’s release.