March 14 (The following statement was released by the rating agency)
General Motors Company's (GM) recall of faulty
ignition switches in 1.6 million vehicles primarily presents reputational risk
for the company, although follow-on costs could mount, according to Fitch
Ratings. A federal probe examining the length of time it took GM to announce the
recall and the near-continuous stream of negative headlines related to it could
exacerbate the situation. We do not currently expect the recall to have an
effect on GM's ratings or Outlook, but we are monitoring the situation closely
as more information becomes available.
We believe direct costs associated with the recall, along with any associated
fines, will likely be manageable and will not affect the company's credit
profile. The cost of the part itself is estimated to be low and changing the
switch should be a simple and relatively quick process. We estimate that the
cost of the recall could be less than $100 million. We also view GM's offer of a
$500 incentive toward the purchase of a new vehicle as having a limited
financial impact on the company as well.
Any potential fine from the National Highway Traffic Safety Administration
(NHTSA) would probably be capped at $35 million, which we view as quite
manageable given the company's cash generating capabilities.
Legal costs associated with lawsuits that are likely to be filed are unknown and
could pose more of a risk. Lawsuits tied to accidents that occurred prior to
GM's 2009 bankruptcy may be considered prepetition claims, but the actual impact
on GM will depend on how the courts view these claims and what legal avenues
might be available to plaintiffs. Any settlement costs could be significant as
well. GM will also incur legal costs associated with its own internal
investigation into the matter.
The longer term impact to the brand will largely depend on the company's
handling of the situation. The vehicles affected by the recall have all been out
of production for a number of years, and there are no indications that any
vehicles currently in production have similar issues. However, potential
customers could be concerned about the internal workings of the company that led
to the apparent delay in deciding to recall the vehicles. GM's management will
need to convince potential customers that the internal issues that led to the
recall delay have been rectified.
Indirectly, another cost of the recall is the time that senior management will
spend focusing on it. GM currently has several significant restructuring actions
underway globally, as well the launch of key new vehicles. The recall is likely
to divert some management attention away from these other important activities
at a critical time for the company. That the company's top senior leaders are
relatively new to their positions could add to the challenges.