Ratings agency Standard & Poor's raised its corporate credit rating on General Motors Co by two notches Thursday, saying the automaker's new labor contract would allow for continued profitability and cash generation in North America.
The ratings service revised upward its credit rating on GM to BB+ from BB- and also raised its rating outlook to "stable" from "positive."
The upgrade comes a day after the United Auto Workers union ratified a new four-year labor contract with GM, the first such deal for the top U.S. automaker since its 2009 bankruptcy.
The automaker said the contract would allow it to make money even if U.S. auto sales plunged by 15% from the still-weak levels of 2011 and will boost its costs by only $20 million annually in 2012 and 2013.
"GM has a two-year track record of profits and cash flow generation in its global automotive operations, supported by strong performance in North America," Standard & Poor's said in a statement released Thursday.
As auto sales in North America continue to recover gradually, GM is expected to generate positive free automotive operating cash flow of at least $5 billion in 2011, the agency said.
"The upgrade reflects our view … that GM's prospects for generating free cash flow and profits continue to solidify, because of its cost base in North America, combined with prospects for some gradual improvement in light-vehicle sales in North America into 2012," S&P credit analyst Robert Schulz said.
Leading industry research firm J.D. Power expects U.S. auto sales to total 12.6 million vehicles this year, which would be a 9% increase from 2010. For 2012, it sees sales of 14.1 million vehicles, but has added that a high level of uncertainty remains.
Most analysts and industry executives expect consumer demand for new cars and trucks to continue to recover from the depressed levels of the late 2000s, but caution that the pace of recovery would be slow in a fragile U.S. economy.
GM shares were up 1.4% at $20.70 at midday.