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GM Planning $13-Billion Bond Sale

The automaker will use the proceeds to bolster its pension plan, which was underfunded by $19.3 billion last year.

June 21, 2003|From Reuters

General Motors Corp. said Friday that it would sell about $13 billion of bonds, one of the largest corporate debt offerings ever, to help shore up its U.S. pension plan, which ended last year underfunded by $19.3 billion.

GM is tackling one of its biggest challenges: a pension deficit that is the largest of any U.S. company.

The company will raise about $10 billion in bonds and convertible securities, most of which will be used for its U.S. pension fund. Its finance unit, General Motors Acceptance Corp., will raise about $3 billion in bonds to fund operations, the world's largest automaker said.

"The pension is certainly weighing on the company," said Bill Turner, an equity analyst with Banc One Investment Advisors. "It effectively buys GM a little bit of time, so the stock is reacting favorably. It's replacing three-to-five-year liabilities with a longer maturity."

GM said the debt offerings, which will be sold in six tranches likely by the end of next week, will allow it to make significant cash contributions to its U.S. pension fund health-care obligations late this year.

Three successive years of stock market losses resulted in GM's pension shortfall.

The automaker spent $4.5 billion last year on health care for 1.2 million employees and retirees and their dependents, making GM the largest private purchaser of health care in the U.S.

Yield spreads on GM's bonds widened as much as 0.25 percentage point after news of the debt sale, bond traders said.

Pension deficit is a problem shared by much of corporate America. Investment bank UBS said Standard & Poor's 500 companies had a combined deficit of about $239 billion -- an all-time high -- and it's growing.

Moody's Investors Service and Standard & Poor's affirmed their credit ratings for GM and GMAC on Friday, though both companies still have a negative outlook.

In the last week, Moody's and Fitch Ratings have cut GM's long-term debt ratings because of the automaker's hefty pension and health-care obligations. The ratings at both companies remain one notch above the ratings at S&P.

GM said the debt offerings take advantage of low interest rates and allow it to free up cash and give the company more flexibility.

Stock market gains have boosted GM's pension plan assets by 9% this year, but that has been offset by lower interest rates.

GM's offerings are expected to include intermediate- and long-term debt in U.S. dollars and euros, as well as U.S. dollar debentures that are convertible into GM common stock.

The debt offerings will double GM's 2003 target for strengthening its balance sheet to $20 billion from $10 billion and increase near-term liquidity to more than $30 billion, GM said.

The automaker has been selling non-core assets and diverting much of its cash flow to its pension and retiree health-care plans.

GM has said it would contribute about $15 billion to the plans by 2007.

It said this year that the company probably would use a portion of the $3.8-billion proceeds from the sale of its stake in Hughes Electronics Corp. to Rupert Murdoch's News Corp. to fund its pension plan. GM expects the deal to be completed by the end of the year.

GM shares rose 52 cents to $38.59 on the New York Stock Exchange.

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