GM – Closed CDS 169bps, Base Case iCDS 103bps, Negative Case iCDS 180bps, 2028 5.000% Bond YTW of 5.463%, iYTW of 5.034%, Baa3 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need
February 28, 2023
- Credit markets are slightly overstating GM’s credit risk with a YTW of 5.463% and a CDS of 169bps relative to an Intrinsic YTW of 5.034% and an Intrinsic CDS of 103bps. Meanwhile, Moody’s is accurately stating the firm’s fundamental credit risk with its Baa3 credit rating one notch lower than Valens’ IG4 (Baa2) credit rating.
- Incentives Dictate Behavior™ analysis for GM’s management compensation framework highlights mostly positive signals for credit holders. Management’s compensation metrics should drive them to focus on all three value drivers: asset efficiency, margins, and top-line growth, leading to Uniform ROA expansion and increased cash flows available to service debt obligations. In addition, while most management members are not material owners of GM equity relative to their annual compensation, CEO Barra’s significant holdings indicate she can likely persuade other NEOs to align with shareholders for long-term value creation.
- Earnings Call Forensics™ of GM’s Q4 2022 call highlights that management sentiment was positive when talking about EVs and AV, and production. Management is confident the Chevrolet Bolt EV and EUV were the best-selling mainstream EVs in the second half of the year, that inventory turned on these two vehicles in less than 10 days, and that Chevrolet 6 top ranked vehicles in the industry. Moreover, they are confident their investments in Cruise Origin, better routing and pricing algorithms are going to drop costs and improve unit economics as they scale to more cities. Management is confident their Spring Hill plant is back on track and that they are closely monitoring the macro environment to make sure they are appropriately matching supply with customer demand.
