GMAC expected to be profitable in 2008; ResCap to meet year-end financial covenants

By Jennifer Lanning Drey

Portland, Ore., Jan. 17 - General Motors Corp. expects General Motors Acceptance Corp. (GMAC) to be profitable in 2008, with substantially reduced losses at Residential Capital, LLC (ResCap) due to risk mitigation actions undertaken by the company, Fritz Henderson, GM's chief financial officer, said Thursday during an analyst presentation.

ResCap is expected to meet its financial covenants for year-end 2007, the CFO further reported during the Automotive Securities Analysts' Event held in Dearborn, Mich.

He added that GM believes GMAC is now adequately capitalized following the conversion of $1.1 billion of preferred equity to common equity, which took place during the fourth quarter, and a $1.0 billion contribution made by GM in the first quarter.

Despite the strengthened capital position, GMAC will not make common dividend distributions but instead use any retained earnings to build its capital, Henderson said.

GMAC's liquidity currently stands at relatively high historic levels, according to GM.

Prepared for downturn

The majority of Thursday's presentation focused on GM's own drive for cost savings and revenue growth, as well as its upcoming plans and strategies for weathering a potential downturn.

GM's goals for 2008 include reducing risk and improving earnings at ResCap, dealing with business risks that are affecting the company's stock valuation, and implementing its 2007 UAW labor agreement, which is expected to significantly improve cash flow beginning in 2010.

Additionally, GM will focus on growth in emerging markets and maintaining a strong liquidity position in order to address potential downside risks.

"We certainly feel very good about the opportunities we have for cost reduction, for brand improvement, for returning our business in North America and Europe to better levels of sustainable profitability and then growing our revenues, profits and cash flows in emerging markets," Henderson said.

The CFO detailed GM's expectation of a challenging environment in 2008, which is likely to be characterized by higher fuel costs and intense competition.

At the same time, the CFO also conveyed confidence in GM's liquidity position and ability to overcome the headwinds it may face in the coming year.

"From our perspective, we're confident in our liquidity position in 2008. We think it's certainly ample to finance the business based upon our baseline forecast and we could finance any requirements in a downturn.

"We can sustain our business, we can fund our capital spending and our product programming and we can meet our requirements," Henderson said.

GM projects that entering a downturn, it would need liquidity between $18 billion and $20 billion and access to between $4 billion and $5 billion of credit lines.

The company ended 2007 with gross liquidity of approximately $27 billion and $7 billion of undrawn credit facilities.

GM is a Detroit-based developer, producer and marketer of cars, trucks and parts.

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