GM agrees $14bn finance arm deal

Falling US sales have dented GM's finances

General Motors has announced it is to sell a majority stake in its highly profitable financing business to a hedge fund-led group for $14bn (£8bn).

The struggling car giant had been in talks with Cerberus Capital Management about selling GMAC - which made a $2.8bn profit in 2005 - for weeks.

GM is trying to raise money to shore up its finances, which have been hurt by weak sales and large pension costs.

It also faces huge liabilities from bankrupt car parts firm Delphi.

Vital funds

GM made a $10bn loss last year and is cutting 30,000 jobs in an effort to make its business more competitive.

It will raise $7.4bn upfront from the sale of 51% of GMAC to a group including Cerberus, Citigroup and Japan's Aozora Bank.

This agreement is another important milestone in the turnaround of General Motors Rick Wagoner, GM chief executive

The deal will also yield a further $6.7bn from car lease and retail assets, which GM will retain, and financing costs over the next three years.

GM said the deal would be a major step in the company's effort to drag itself back into profitability.

GM shares rose 8 cents to $21.35 after details of the sale were announced.

"This agreement is another important milestone in the turnaround of General Motors," said chief executive Rick Wagoner.

"It provides significant liquidity to support our North American turnaround plan, finance future GM growth initiatives, strengthen our balance sheet and fund other corporate priorities."

Pension costs

GM faces huge challenges as it tries to turn around its fortunes.

Fierce competition from more competitive foreign firms such as Toyota and Nissan have eroded its sales in the US.

Like great US rival Ford, it also has to deal with massive labour costs.

We have become even more concerned about how developments at Delphi are unfolding Standard & Poor's

It struck a deal with unions last year to cap its pension and healthcare contributions, but GM also faces potential liabilities from Delphi - the ailing car parts firm it once owned - of up to $12bn.

Delphi is taking legal action to try and invalidate a host of GM contracts - which it says are highly unprofitable - and labour agreements with its own staff as it seeks to guarantee its long-term survival.

The dispute could prompt strike action by Delphi staff, which in turn could cost GM huge amounts in lost output.

Credit concerns

Some analysts have warned that GM's financial position remains precarious and it could yet be forced into bankruptcy.

Credit ratings agency Standard & Poor's said on Monday it may further lower GM's credit rating - a measure of its ability to meet its borrowing commitments - at any time because of "evolving events" at Delphi.

GM currently has a long-term B rating which - were it to be further downgraded - would signify that it was considered "vulnerable" and "dependent on favourable conditions to meet financial commitments".

"We have become even more concerned about how developments at Delphi are unfolding," Standard & Poor's said in a statement.

"If Delphi is successful in rejecting its high-cost labour contracts and a large portion of its auto parts supply contracts with GM, this could prove extremely costly to GM."