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GM Undertakes Refinancing Activity

Zacks Equity Research

General Motors Company (GM) announced the offering of senior unsecured notes for 5, 10 and 30-year periods. The company expects that the offering will close by Sep 30, 2013.

The offering will be made only to qualified institutional buyers in the U.S., according to Rule 144A under the Securities Act of 1933. Outside the U.S., the offerings will be made in accordance with Regulation S of the Securities Act.

General Motors will utilize the proceeds to repurchase 120 million shares of its Series A Preferred Stock from the UAW Retiree Medical Benefits Trust (UAW VEBA). Remaining proceeds will be used for other general corporate purposes.

Presently, UAW VEBA has 260 million shares of Series A Preferred Stock of General Motors and Canada Holdings holds another 16 million shares.

As a result of this share repurchase program, General Motors needs to make an investment of around $3.2 billion or $27 per share. The purchase price is at a premium to the liquidation preference of $25 per share. The shares carry an annual cumulative dividend rate of 9%.

This refinancing is expected to benefit the earnings of the company and lower the interest expenses. In addition, the interest paid on unsecured debt will have tax benefits. However, the company will incur a charge of $0.8 billion in the third quarter due to this repurchase program.

General Motors intends to redeem all the outstanding preferred shares worth $6.9 billion, including those held by VEBA and Canada Holdings by the end of 2014. As a result, the automaker expects to have enough liquidity in future.

General Motors had cash and cash equivalents of $19.7 billion as of Jun 30, 2013 compared with $18.4 billion as of Dec 31, 2012. Total debt (Automotive and Financial) increased significantly to $26.7 billion as of Jun 30, 2013 from $16.1 billion as of Dec 31, 2012. Consequently, debt-to-capitalization ratio increased to 41.1% as of Jun 30, 2013 from 30.7% at the end of 2012.

Currently, General Motors retains a Zacks Rank #3 (Hold). Other stocks that are performing well in the industry include Ford Motor Co. (F), Volkswagen AG (VLKAY) and Tesla Motors, Inc. (TSLA). Volkswagen carries a Zacks Rank #1 (Strong Buy), while Ford and Tesla carry a Zacks Rank #2 (Buy).

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