General Motors Co.'s record $26 billion pension terminationfalls short of improving the largest U.S. automaker's financesenough to let it join Ford Motor Co. as an investment-grademarque.

While transferring some retirement obligations to a PrudentialFinance Inc. unit will remove liabilities from Detroit-based GM'sbooks, the use of as much as $4.5 billion of its own cash “willbalance out” the benefits, Moody's Investors Service said in areport yesterday.

“The transaction is too small,” Colin Langan, an analyst at UBSInc.'s investment-banking unit in New York, wrote in a note toinvestors yesterday. Even after the pension shift, GM's “obligationwould still be larger than any company within the S&P 500.”

A ratings upgrade would let GM, which had $134 billion ofpension obligations at the end of last year, borrow at lower costrelative to benchmarks. Ford's bond yields increased 22 basispoints from a year earlier to 279 basis points more thancomparable-maturity Treasuries on April 24, the day it was raisedto investment grade by Fitch Ratings, while all high-yieldautomakers' costs rose 86 basis points to 409 over that span,according to Bank of America Merrill Lynch index data.

GM isn't surprised that the pension changes didn't result in animmediate upgrade to its credit rating, Jim Cain, a spokesman, saidin a telephone interview yesterday.

“The rating agencies have certainly recognized our progress andthere's clearly a lot more work to do, both to drive our marginshigher and address other risks to the business,” including thecompany's European division, he said.

The automaker is shifting liabilities for salaried U.S.employees, whose plans are better-funded than hourly and foreignretirees. Removing salaried-pension payments from its books whileleaving $24 billion unfunded for the rest of its future retireesdidn't do enough to improve GM's credit profile to warrant anupgrade, Moody's said.

Moody's rates GM debt Ba1 and Standard & Poor's gives it anequivalent BB+, both of which are one level below investment grade.Fitch has the automaker at BB, two steps into speculative status.None of the ratings companies changed their evaluations of theautomaker after last week's pension shift.

GM said in a June 1 statement it will offer lump-sum payments toabout 42,000 salaried retirees and shift plans to Prudential.Moody's said it was the largest pension termination of its kind.The changes apply to some retired U.S. salaried employees, notformer union workers or retirees in other countries.

GM Swaps

Five-year credit-default swaps on GM have added 32 basis pointsto 385 basis points since May 31, the day before it announced thepension change, according to prices compiled by Bloomberg. Thatmeans investors pay $385,000 annually to protect $10 million ofGM's debt from losses. Rising credit swap prices imply increasinginvestor concern that the company may default on its debt.

The GM swaps imply the company's debt rating should be Ba3,according to Moody's Corp.'s capital markets group, one level belowthe current Fitch grade and two below Moody's and S&P.

Swaps linked to Ford's debt are 265 basis points and those ofits finance arm are 238 basis points, Bloomberg data show. BobShanks, Ford's chief financial officer, said his company would notemulate GM in shifting pension obligations. “We don't think we haveexcess cash,” he said in an interview with Bloomberg in hisDearborn, Michigan office yesterday. The automaker, which has a $74billion global pension liability, is offering lump-sum pensionpayments to about 98,000 U.S. salaried employees and retirees.

GM is joining companies including Alcoa Inc. and Textron Inc.that are digging out of pension deficits created by near-zerointerest rates, which drive down the corporate bond yields used todetermine future pension obligations. Lower rates mean companiesmust set aside more cash for future payouts to retirees orundertake novel arrangements like transferring the liabilities toinsurance companies.

“The bulk of the remaining $24 billion underfunded positionrelates to GM's U.S. hourly workers and non-U.S. pension plans,which are not affected by the transaction,” Moody's analyst BruceClark wrote in the report yesterday. “We don't believe that thesalaried pension plan actions will meaningfully improve GM'soverall credit profile, rating, or prospects for returning toinvestment grade.”

Insurers Rally

GM posted a profit of $9.19 billion and regained its status asthe world's top selling automaker last year, following aU.S.-government bankruptcy reorganization in 2009.

Prudential led a rally of life insurers today as investors betthe company's agreement to handle GM's pension obligations maysignal more opportunities for the industry. Prudential, thesecond-largest U.S. life insurer, advanced 2.8 percent to $46 at12:31 p.m. in New York. MetLife Inc., the largest U.S. insurer,climbed 2.3 percent.

“A reluctance to commit to long-term investments may put large,old-line Fortune 500 firms in a fiscal position and a corporatemindset to engage in pension closeout-type transactions similar tothe GM deal,” Wells Fargo & Co. analysts led by John Hall saidin a note yesterday. “We would not be surprised to see more suchdeals from Prudential or other competitors in the pensionrisk-transfer space including MetLife.”

While Chief Executive Officer Dan Akerson said he hopes GMreturns to investment-grade status within the next year, he hassaid there are other ways to judge the performance of the company.Akerson, 63, is pushing to improve operating margins and buildChevrolet and Cadillac into more global brands.

GM's pension move reduces future volatility and allows thecompany to focus on building cars, Joseph Spak, an industry analystwith RBC Capital Markets, said as the lead author in a note toinvestors on June 1.

“We view the announcement favorably as it reduces GM's risk andimproves their flexibility,” Spak wrote. “Moreover, we believe thissets a template to deal with the larger U.S. hourly worker pensionobligation.”

Such a deal with the United Auto Workers union might cost about$9 billion, Brian Johnson, an industry analyst at Barclays Plc saidin a telephone interview yesterday. He first raised the possibilityof a pension buyout in September 2011.

'Major Overhang'

“Those of us with a longer, historical view recognize that it'sbeen a major overhang on the company,” Johnson said of the pensionliabilities.

The pension termination will allow GM to eliminate about $26billion from its obligations. The offers are a first for GM, whichprojects a second-half expense of $2.5 billion to $3.5 billion anda $200 million decrease in annual pension income.

GM, along with Ford, fell to junk status in 2005 as part of aslide that eventually included the company's government-backedbankruptcy reorganization in 2009. Ford avoided bankruptcy,recorded a $20.2 billion profit last year and was returned toinvestment grade by Fitch and Moody's.

The gap between the assets of the 100 biggest company pensionsand projected liabilities increased by $39 billion to $267 billionin April, the first time this year the gap has widened, accordingto Milliman Inc., a Seattle-based actuarial and consultingfirm.

S&P said in a June 1 report that the pension changes don'taffect GM's credit ratings. Fitch characterized them as a positivebecause they will reduce future volatility in the company's cashpension obligations and said it has enough free cash flow to makethe payments under the agreement.

While GM posted its ninth straight profitable quarter in thefirst three months of 2012, earnings were reduced by continuedlosses in Europe. GM has lost $16.4 billion in the region, whichincludes its Opel operations, since 1999.

The automaker last year appeared on track to break even untilNovember as Europe's economy worsened. Akerson was part of the GMboard that decided against selling the company's German-based Opelunit in 2009.

European uncertainty regarding its debt crisis and weakeningChinese economic performance aren't helping convince investors thatit's time to purchase GM securities even with the pension changes,Johnson said.

“It's taking away a reason not to buy GM, but in this kind ofmacro market we're going to have to wait for a reason to buy it,”he said.

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