In general, GM’s total debt consists of both current and long-term portions and are divided into Automotive and GM Financial.
The following snapshot shows the current and long-term portion of GM’s debt in the balance sheet extracted from the 4Q 2020 annual filings.
As shown in the snapshot above, the majority portion of GM’s debt came from GM Financial which totaled more than $90 billion as of Q4 2020.
GM automotive debt mainly consists of unsecured debts. Most of the debts are revolving credit facilities and senior unsecured notes in which the company issued as bonds to fund the core operation and to repay maturing debt.
Here is a snapshot of GM automotive debt extracted from the annual filings dated Dec 31 2020:
GM’s automotive debt reached about $17 billion as of 2020 Q4 as seen in the snapshot above, with the unsecured debt making up the majority of it.
GM Financial Debt
GM Financial is a subsidiary that provides financing services to retail customers and dealerships.
Here is a snapshot of GM Financial debt extracted from the annual filings dated Dec 31 2020:
As shown in the snapshot above, GM Financial debt is divided between secured and unsecured debt, with unsecured debt making up slightly more than secured debt.
Secured debt consists of revolving credit facilities and securitization notes payable. Most of it was issued by Variable Interest Entities (VIE) and is repayable only from proceeds related to the underlying pledged asset.
Unsecured debt consists of senior notes, credit facilities and other debt instruments.
Important Notes to Readers
Keep in mind that GM’s debt in the following discussion includes only the short and long-term debt portion while excluding other liabilities, including contractual obligations involving purchase obligations, post-retirement benefits and operating leases.
However, the long-term debt portion does include finance lease obligations.
To further illustrate, GM has a series of minimum commitments under contractual obligation, including purchase obligations, post-retirement benefits and operating leases which contributes quite a huge sum of liabilities to the company.
Here is a snapshot of GM contractual obligations extracted from the annual statement dated Dec 31 2020:
For example, the operating lease obligations and materials liabilities are not included as part of GM’s debt.
Chart of General Motors’ Total Debt
The chart above shows the trend of GM’s total debt for the previous 5 years from 2015 to 2020.
As seen from the chart, GM’s total debt has been on an increasing trend over the past 5 years.
In 1Q 2015, GM’s total debt was only $48 billion, but the amount reached a record high of $127 billion in Q1 2020.
GM’s debt amount stayed at this level consecutively for 2 quarters before declining slightly to $110 billion in Q4 2020.
GM’s debt was particularly elevated in the early quarters of 2020, showing just how easily the company was in racking up more debt in the age of the COVID-19 pandemic.
GM probably foresaw a liquidity crunch when the pandemic first struck in 2020, thereby causing the company to borrow more to prepare for a worst-case scenario.
General Motors’ Debt Breakdown
To further illustrate how GM’s total debt has grown so much in such a short amount of time, I have created the chart above to show the breakdown of General Motors’ debts.
The chart above shows GM’s total debts breakdown into two business segments: GM Automotive and GM Financial.
From the chart, it can be seen that GM Financial contributed the most debt to the company.
As of 4Q 2020, GM Financial’s debt reached as much as $92 billion and took up more than 80% of the company’s overall debt.
GM Financial’s debt grew the most in the early years but the figure has leveled off to about $90 billion since 2019 and stayed at this amount until 2020.
In contrast, GM Automotive debt has certainly grown at a slower rate compared to GM Financial over the same period.
However, GM Automotive started to accumulate an enormous amount of debt in 1Q 2020, causing total debt to soar nearly 100% to as much as $30 billion in 1Q 2020 and more than $34 billion in 2Q 2020.
General Motors may have anticipated a pandemic outbreak in 2020. For this reason, it resorted to borrowings to shore up its cash position in preparation for a looming economic downturn.
Knowing that things were not as bad as GM had expected, it slowly paid off its automotive debt in 3Q and 4Q 2020, thereby leading to the decline in the automotive debt to a pre-pandemic level which was around $17.5 billion in 4Q 2020.
While GM Automotive debt has declined to a pre-pandemic level as of 2020 Q4, GM Financial debt has remained unchanged in the same quarter.
Effect of Operating Lease on GM Total Debt
As of 4Q 2020, GM’s operating lease total liability was only $1.5 billion. As such, its effect on the total debt was negligible.
Effect of GM’s Surging Debts
GM’s surging debts in 1Q and 2Q 2020 has caused the company to suspend share repurchase and the cash dividends on common shares as shown in the following excerpt extracted from the 1Q 2020 quarterly filings.
GM’s quarterly cash dividend suspension started in 2Q 2020 and lasted indefinitely.
Has GM Used Debts Effectively?
With debt rising in the last 6 years, how did GM use them? Has the company used debt effectively? Let’s take a look.
GM could use the debt to expand the business by buying up assets and paying down old debts. Other than that, GM could enrich its shareholders through shares buyback and dividends or both with debts.
The latter practice is highly not encouraged as the company does not have the needed funds for stock repurchase and dividends. Instead, the company is using borrowed capital to fund the stock repurchase and dividends.
For General Motors, I believe the company has been using debts effectively which is to expand the business through assets acquisition.
Although the company has been paying dividends continuously since 2014 and partially buying back its shares, it has been self-sufficient when it comes to dividend payments.
Over the past 5 years, GM has been generating enough operating and free cash flow to fund its dividends payout as seen from this article: GM Dividend Analysis.
As seen from the following chart, GM’s total debt and long-term assets have been trending in the same direction.
While total debts have increased from 2015 to 2020, so have total long-term assets.
Based on the chart, there is a close correlation between GM’s total debts and assets.
In short, GM has been using debts effectively all these years. It has been doing so by acquiring valuable assets that are expected to generate more revenue in the future.
GM’s Total Debt vs Revenue Growth
The prior chart shows that GM’s long-term assets have been increasing over the years, along with total debt.
With the growing assets, we should expect the company’s sales or revenue to grow along with the expanding assets.
However, the chart above seems to show a different story, with both plots heading in the opposite direction.
While GM’s total debt has grown over the years, the company’s TTM revenue seems to be declining and reached a new low as of 2020 Q4.
What’s wrong with GM?
Chart of General Motors’ Interest Expenses
The last chart above shows the annual interest expenses incurred by the company as a result of debt over the previous 6 years from 2015 to 2020.
From the chart above, GM’s interest expenses have been on an increasing trend over the years.
In 2015, GM incurred roughly $1.9 billion in interest expense. However, the interest expense increased to $4.4 billion in 2019, which was more than 2X the amount in 2015.
GM’s interest expense declined slightly in 2020 to $4.12 billion.
On a long-term basis, GM’s interest expense has been rising steadily.
The growing interest expenses have been a result of the company’s increasing indebtedness.
GM total debts, both current and long-term, have increased tremendously since 2015. The number was only $48 billion in 1Q15. However, total debts have increased to $110 billion in 4Q20, one of the record highs for the company.
GM Financial, a subsidiary of GM, contributed the most debt to the company. GM Financial debt made up more than 80% of the company’s total debt in 4Q 2020.
Similarly, GM Automotive debt reached its peak at $34 billion in 2Q 2020 before declining to $17 billion in 4Q 2020.
GM paid down its automotive debt when things were not as bad as it has anticipated by the end of 2020.
The pandemic actually helped in GM’s favor – its sales soared in 3Q and 4Q 2020.
From the correlation between assets and debts, GM has used debts effectively.
While GM’s debt has grown higher, so have its total assets.
However, the expansion of GM’s assets has not lifted its revenue. GM’s TTM revenue has actually declined and hit a new low in 4Q 2020 even though total debts and assets have both grown substantially during the same period.
Due to the increasing indebtedness, GM’s interest expenses have also been increasing over the years from only $1.88 billion in 2015 to $4.12 billion in 2020.
References and Credits
1. Financial figures in all charts and images were obtained and referenced from GM Earnings Releases.
2. Featured images in this article are used under creative commons license and sourced from the following websites: GM Earnings Release and 2020 Outlook.
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