S&P Turns Positive on GM After Labor Accord

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<h3>James A. Klotz</h3>

James A. Klotz

Standard & Poor’s, which has long been a critic of General Motors, is impressed with the automaker’s labor accord and may boost its credit rating.

S&P said it is likely to also improve Ford’s credit rating.

S&P placed both companies’ long-term credit ratings on CreditWatch with positive implications. It did not indicate how far the automakers’ ratings might be raised.

Although GM’s contract must still be approved by the United Auto Workers’ membership, S&P’s action recognizes that the labor contract seeks to resolve the large retirement and health obligations that GM had accumulated under previous labor agreements. Ford has yet to reach an agreement with the UAW, but S&P indicated that it expects a similar outcome.

S&P uses CreditWatch to alert investors that a specific event within a short period of time could lead to a rating change. In GM’s case, S&P will review the labor agreement in detail with an eye toward the contract’s impact on the company’s liquidity and long-term finances. The rating agency also plans to meet with GM’s senior management to better gauge the labor pact’s implications. Upon completion of a contract with Ford, a similar review will take place. The resolution of both companies’ CreditWatch actions will take place separately, based on the time needed for review and analysis.

The agreement reached today with the UAW transfers GM’s retirement health care obligations to the UAW along with specified funding. Once the transaction is completed, the union will be required to manage health care benefits for its members and GM’s exposure to this growing benefit will be significantly reduced.

Although most details of the labor pact have yet to be released, a potentially damaging strike has now ended and GM’s cost disadvantage over its foreign competitors is expected to shrink.

James A. Klotz is the President of FMSbonds, Inc.
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Sep 26, 2007

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