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GM Prices Senior Notes, Moody's Rates Ba1

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General Motors Company (GM - Free Report) has fixed interest rates of 3.5%, 4.875% and 6.25%, respectively, for the three tranches of its new senior unsecured notes due in 2018, 2023 and 2043. The company will issue $1.5 billion of each type of note and expects to complete the issue on Sep 27, 2013.

Out of the $4.5 billion that will be raised, $3.2 billion will be used by General Motors to buy back 120 million shares of its Series A Preferred Stock from the UAW Retiree Medical Benefits Trust (UAW VEBA). The company will repurchase the shares at a premium price of $27 per share compared with the liquidation preference of $25.

Another $1.2 billion of the proceeds will be used by General Motors to make an advance repayment of the outstanding 7% notes held by the Canadian Auto Workers' Union Health Care Trust. These notes are repayable in installments till 2018.

The remaining $0.1 billion will be used for other general corporate purposes.

Impact of the Refinancing

General Motors will incur a one-time charge of $0.8 billion in the third quarter due to the share repurchase plan. However, the company is expected to witness earnings growth of 11 cents per share due to the refinancing.

The gain will result from the lower interest rate on the senior notes compared to the preference shares, which carry an annual cumulative dividend rate of 9%. In addition, the interest paid on unsecured debt will have tax benefits. Moreover, the refinancing is expected to boost the financial strength and flexibility of General Motors.

Rating Action

Moody’s Investor Services has assigned a “Ba1” rating to the senior notes. Additionally, the rating agency upgraded the corporate family rating (CFR) of General Motors to “Baa3” from “Ba1”. This raised the company to an investment grade.

Moody’s also raised the Probability of Default Rating (PDR) of General Motors to “Baa3-PD” from “Ba1-PD”. Further, the rating agency affirmed the “Baa2” rating on the secured credit facility and withdrew the Speculative Grade Liquidity rating of the company. All the ratings carry a stable outlook.

Zacks Rank

Currently, General Motors carries a Zacks Rank #3 (Hold). Other stocks that are performing well in the industry include Ford Motor Co. (F - Free Report) , Volkswagen AG (VLKAY - Free Report) and Nissan Motor Co. Ltd. (NSANY - Free Report) . Both Volkswagen and Nissan carry a Zacks Rank #1 (Strong Buy), while Ford carries a Zacks Rank #2 (Buy).

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