Fitch Downgrades GM And GMAC to 'BBB', Outlook Remains Negative.

CHICAGO -- Fitch has downgraded the senior unsecured debt of General Motors Corporation (GM) and its financial services subsidiary, General Motors Acceptance Corp. (GMAC) and related entities to 'BBB' from 'BBB+'. Fitch affirms the corresponding commercial paper ratings at 'F2'. The Rating Outlook remains Negative.

The downgrade and Rating Outlook reflects ongoing margin compression in the U.S. and Europe that is likely to continue over the near term, the near-term competitive position of the company's truck portfolio, a car portfolio that remains currently weak, and significant post-employment benefit obligations. Of particular concern is the continuing pace of escalation in health care costs, which disproportionately disadvantages GM due to its legacy liabilities and represents perhaps the most significant cost headwind. GM's truck portfolio, the major source of its domestic profitability, is facing new competitive threats over the next several years with GM product that is becoming dated, potentially leading to further price erosion and margin deterioration. Losses in Europe continue to mount, with further restructuring likely. Offsetting factors include GM's gross liquidity position, the extended nature of its debt maturity schedule, continued strong performance in the Asia Pacific region, and strong profitability at GMAC. GM has substantially increased its funding of pension and other post-employment benefit (OPEB) liabilities over the past several years, although this has been accomplished through the sale of numerous assets and a substantial increase in debt. Total debt at the automotive operations has increased from $16.2 billion at Dec. 31. 2002 to $32.4 billion at June 30, 2004, adding incremental financial expenses of approximately $1 billion and resulting in a net debt position (including short-term VEBA) of $7.4 billion as of June 30, 2004. The increase in debt could increase the cost and amount of capital should further access to external capital markets be required. Further reductions in cash generated from operations could limit the company's flexibility in making capital investments and legacy obligation funding to the extent of the recent past.

Although sales volumes have been sustained at healthy levels, higher incentives, and lack of flexibility in the company's cost structure indicates that this has come at the expense of profitability. Margin erosion over the near term will be further pressured by cost headwinds such as commodity prices (especially steel) and health care costs. Although new products can somewhat mitigate this trend, the likelihood of a significant change is unlikely given that the products launched between now and the end of 2005 consist principally of cars and as such are not the most profitable products in GM's lineup. Given these trends and the concentration of GM's profitability in full-size trucks/utilities and mid-size utilities (which are not due to be redesigned until 2006/2007), Fitch anticipates that the next 18 months will likely be challenging ones.

GM's retiree benefit programs remain a concern, despite frequent and substantial contributions to its pension and OPEB plans (in excess of $57 billion to the pension plans from 1992-2003). When combined with good asset performance, 2003 contributions in excess of $18 billion have pushed GM's ERISA credit balance to in excess of $50 billion. As a result, any mandatory pension funding requirements have been pushed out into the next decade. However, failure to achieve moderate asset returns when combined with a lack of increase in long-term interest rates could present a medium- to long-term funding requirement.

In the area of health care, Fitch's concerns continue to mount despite the fact that GM has placed substantial funds into its VEBA Trusts in an effort to begin defeasing its legacy health care costs. The VEBA Trusts provide GM a significant cushion to recover from the impact of any economic downturn in the industry. However, with 2003 OPEB benefits paid of $3.6 billion and costs escalating in excess of 10% annually for the past four years, the situation is not sustainable over the long term given the revenue and margin pressures. GM, to its benefit, has managed to contain the cost escalation at lower levels, primarily due to structural program changes and tighter cost management, but further structural changes will become increasingly difficult. Fitch's view is that the Big Three will, over the next two to three years will be forced to address this issue with their unionized work force, an issue that holds the potential for labor disruption. Given GM's competitive disadvantage in this area, addressing this issue is of greater importance for GM than likely any other worldwide automaker.

Longer term, GM continues to confront a number of legacy issues, particularly in the area of infrastructure and brands. GM's eight brands stand in contrast to most global competitors (which typically possess two to three brands), producing product overlap, lack of product differentiation (and pricing), and higher structural costs. Despite potential platform/product sharing, the ability to allocate management focus and capital sufficient to maintain competitiveness across the brands remains a strong challenge. Offsetting some of this is the fact that the core U.S. brands of Chevrolet, GMC, and Cadillac continue to perform well as does the niche truck brand Hummer. Fitch anticipates that should GM fail to revitalize the Pontiac, Buick, Saturn, and Saab brands in the U.S., further restructuring may be required.

GM has been unable to restore profitability in Europe, likely necessitating a further material restructuring. Despite the well received Astra, the far more competitive small- and mid-car segments in Europe will require a substantial downsizing of the company's European cost structure. This problem is not isolated to GM (to some extent it exists with all European manufacturers), but overcapacity and price competition require a systematic shift reduction to reduce labor costs while improving labor efficiencies to restore profitability. The most likely avenue to accomplish this is to shift production to lower cost countries while balancing this change with the maintenance of the higher value-added work in places like Germany. Given the need to change and the current economic/labor situation in Europe, labor strife cannot be ruled out.

Beyond the U.S./European markets, GM LAAM appears to be stabilizing while GM Asia Pacific continues to produce strong automotive results for the corporation. Of all the regions, the success story remains GM Asia Pacific, where GM's alliance strategy, in combination with a strong presence in China, is producing solid results. Despite GM's very strong China position and attractive near-term prospects in the region, GM's results there remain exposed to economic swings and significant volatility.

General Motors Acceptance Corp. (GMAC) remains an integral part of GM, and thus the ratings of GMAC are linked to those of GM. GMAC automotive and mortgage finance operations have exceeded expectations and are projected to continue to perform well. As such, Fitch anticipates that GMAC will continue to be a significant contributor to GM earnings. Fitch believes that GMAC maintains solid liquidity over the intermediate term to support its operations. Asset quality of the automotive finance portfolio has improved due to improving residual values and better loss experience. Rating concerns for GMAC reflect the cyclical nature of mortgage banking and trend in longer average maturities in the automotive finance portfolio.

Ratings downgraded:

General Motors Corp.

-- Senior debt to 'BBB' from 'BBB+'.

General Motors of Canada Ltd.

-- Senior debt to 'BBB' from 'BBB+'.

General Motors Acceptance Corp.

-- Senior debt to 'BBB' from 'BBB+'.

General Motors Acceptance Corp. of Canada Ltd

-- Senior debt to 'BBB' from 'BBB+'.

GMAC Australia (Finance) Ltd.

-- Senior debt to 'BBB' from 'BBB+'.

GMAC International Finance B.V.

-- Senior debt to 'BBB' from 'BBB+'.

General Motors Acceptance Corp. Nederland N.V.

-- Senior debt to 'BBB' from 'BBB+'.

Opel Bank GmbH

-- Senior debt to 'BBB' from 'BBB+'.

GMAC Bank GmbH

-- Senior debt to 'BBB' from 'BBB+'.

GMAC Bank

-- Senior debt to 'BBB' from 'BBB+'.

General Motors Acceptance Corp. (N.Z.) Ltd.

-- Senior debt to 'BBB' from 'BBB+'.

GMAC Commercial Mortgage Bank Plc.

-- Senior debt to 'BBB' from 'BBB+'.

GMAC Commercial Mortgage Japan K.K.

-- Senior debt to 'BBB' from 'BBB+'.

Ratings affirmed:

General Motors Corp.

-- Commercial paper 'F2'.

General Motors of Canada Ltd.

-- Commercial paper 'F2'.

General Motors Acceptance Corp.

-- Commercial paper 'F2'.

General Motors Acceptance Corp. (U.K.) Finance Plc.

-- Commercial paper 'F2'.

Opel Bank GmbH

-- Short-term 'F2'.

GMAC Bank GmbH

-- Short-term 'F2'.

GMAC Bank

-- Short-term 'F2'.

GMAC Commercial Mortgage Bank Plc

-- Euro commercial paper 'F2'.

-- Short-term deposits 'F2'.

General Motors Acceptance Corp. (N.Z.) Ltd.

-- Commercial paper 'F2'.

GMAC Commercial Mortgage Japan K.K.

-- Short-term 'F2'.