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General Motors test drives its first green bond

© Shutterstock / Jonathan WeissPost Thumbnail

General Motors (NYSE: GM) is on the road to greener finance, as it announced the issuance of its first green bond. Proceeds will be used to align its balance sheet with its ESG goals, and locks in lower rates ahead of further Fed hikes.

The move comes close on the heels of a  75-bps rate hike by the Federal Reserve. GM’s green credentials will be further bolstered by Department of Energy loan commitment to a battery JV with GM’s electric vehicle and motor architecture subsidiary Ultium.

Federal Reserve rate hikes

The move comes amid increasing market speculation that further interest rate hikes from the Federal Reserve could send future borrowing costs higher. The two series of senior unsecured fixed rate notes totalling $2.25 billion could be used by the company to finance or refinance, in whole or in part, eligible projects described in GM’s 2022 Sustainable Finance Framework. The issue includes $1 billion of 5.4% notes due in 2029, and $1.25 billion in 5.6% notes due in 2032.

Green bonds remain the dominant source of debt-related sustainable financing, ahead of social bonds, sustainability bonds and sustainability-linked bonds (SLBs). While aggregate volumes of issuance across the entire category was down 21% in 1H 2022, year-on-year, Moody’s expects full year issuance of $1 trillion, roughly flat compared to last year.

GM partnership with LG and DoE to build electric vehicle Battery cell plants

The news follows previous announcement of a $2.5 billion conditional commitment by the Department of Energy to a joint venture between GM and Korean electronics giant LG called Ultium Cells LLC, to build battery cell plants for EVs.

If approved, this loan would reduce the capital required of the joint venture partners, with proceeds from Ultium’s sale of cells to GM helping repay the loans. GM has said it plans to invest $35 billion to build 1 million EVs in North America by 2025, signing multiple supplier agreements with the likes of LG Chem, Livent, POSCO Chemical, and Glencore.

GM has superior green credentials vs. peers?

An analysis by Greenpeace comparing the top 10 global carmakers on their decarbonisation performance ranked GM above its major competitors Toyota, Honda and Ford. The major criteria used in the analysis were plans to phase out internal combustion engine (ICE) vehicles (with a dominant weighting of 80%), their supply chains, and practices relating to resource sustainability over the past 5 years.

GM also outranked seven of the ten automotive groups in its ICE phase-out plans, even though it has far to go to achieve its goal of 100% zero tailpipe emission light-duty vehicles by 2035. Interestingly enough however, many bond strategists believe that a very small portion of the price of a corporate bond is attributed to the issuer’s ESG credentials so the focus on a green bond may be more of a reputational or positioning issue.

Investment grade ratings reflect low operating leverage

The bonds were rated BBB- by Fitch, which is in-line with GM’s corporate credit rating (Baa3 at Moody’s, BBB with S&P). This reflects the rating agency’s positive outlook regarding the auto maker’s profitability and free cash flow over the medium term, despite a forecast for supply chain and inflationary pressures to weigh on margins in 2022.

Fitch views GM’s operating profile to be in line with that of other mass-market automotive peers such as Ford and Volkswagen, with a low financial lever age (debt/EBITDA running near 1.0x) although less geographically diversified than the other two.

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