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Fitch: GM - More Information Needed to Determine Impact of Greenlight Proposal
March 28, 2017 / 9:17 PM / 7 months ago

Fitch: GM - More Information Needed to Determine Impact of Greenlight Proposal

(The following statement was released by the rating agency) CHICAGO, March 28 (Fitch) Fitch Ratings notes that, this morning, Greenlight Capital (Greenlight) published a presentation proposing that General Motors Company (GM) change its common equity to a dual-class structure, with dividend shares and capital appreciation shares. GM responded to Greenlight's proposal with a presentation that adds certain details about the transaction not present in Greenlight's presentation, notably a mention that dividends on the dividend shares would be cumulative. Whether or not the dividends are cumulative is an important distinction that would determine the impact on GM's credit profile and the effect of the proposed dual-class share structure on the company's fixed income investors. Fitch would view cumulative dividends as a credit negative that could result in a ratings downgrade. GM's Issuer Default Rating (IDR) is 'BBB-', so a downgrade would lead to a loss of investment grade status on the $85 billion of GM and General Motors Financial Company, Inc. (GMF) debt outstanding. Fitch expects that more information could be forthcoming on Greenlight's proposal, particularly if it decides to make a proxy filing for a shareholder vote at GM's next annual meeting of shareholders. GM noted in its presentation that Greenlight may also nominate a slate of four directors for GM's board. Fitch will continue to evaluate the proposal as more details become available, but Fitch does not believe that a revision to GM's ratings or outlook is warranted at this time. The proposal laid out in Greenlight's presentation calls for the dividend shares to receive a dividend, initially set at GM's current dividend level, before any distributions could be made to holders of the capital appreciation shares. In terms of voting rights, the dividend shares would receive one-tenth of a shareholder vote, while capital appreciation shares would receive a full vote. GM's presentation suggests that the dividends would be deferrable but cumulative, which Fitch would view as a credit negative. In Fitch's view, a cumulative dividend would make the dividend shares more akin to preferred stock, albeit without a liquidation preference. Fitch believes cumulative dividend shares would not qualify for full equity credit when calculating debt-related metrics, likely raising the company's calculated leverage substantially. In addition, in a period of cash flow pressure, cumulative dividends would result in a significant cash commitment that would not provide the company with the flexibility normally afforded by regular common dividends. Fitch's analytical treatment of hybrid securities is detailed in its criteria report, "Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis". According to its criteria, Fitch assigns no more that 50% equity credit to securities with cumulative dividends that may be deferred. Because the cumulative dividends continue to accrue through the deferral period, the issuer is never able to truly free itself from its dividend commitment. The longer the cumulative dividend is deferred, the larger the deferred liability grows. Fitch acknowledges that there could be some concerns regarding potential governance challenges that could arise over the longer term owing to the diverging interests that would likely develop between the owners of the two classes of stock. Under the proposal, GM's Board of Directors would have fiduciary responsibility to holders of both classes of stock. Although shareholders at the time of the split would receive both dividends shares and capital appreciation shares, Fitch expects that over the longer term, shareholdings would migrate to owners that could have divergent interests. Holders of the dividend shares would likely prioritize steady cash generation, while holders of the capital appreciation shares could have a higher risk tolerance and might prioritize riskier business decisions to boost the share price. Contact: Primary Analyst Stephen Brown Senior Director +1 312-368-3139 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Craig D. Fraser Managing Director +1-212-908-0310 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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