CHICAGO -- Fitch Ratings has downgraded the ratings of GM, GMAC and related subsidiaries to 'BB' from 'BB+' due to a lack of tangible progress in reducing its fixed cost structure (including escalating health care costs and liabilities), the incrementally negative effect on GM's core large vehicles resulting from persistently high gas prices and heightened financial risks to GM associated with resolution of the Delphi restructuring.

In addition, recent incentive programs have established lower market pricing that makes GM increasingly vulnerable to volume declines which could occur as a result of a decline in economic conditions or simply a sustained falloff following recent industry sales spikes. Given continued top-line pressures, financial stresses in the supplier base and numerous impediments to achieving significant structural cost reductions (legacy cost and labor contract restrictions), opportunities for cost reductions have continued to narrow.

Persistently high gas prices are also expected to incrementally reduce demand for GM's large vehicles, where GM is disproportionately exposed in terms of volumes and profitability, and where its new product introductions are concentrated. Industry sale volumes in this segment saw a sharp decline in early 2005, which is likely to mute the volume impact and pricing potential of GM's new GMT-900 product series.

In the absence of significant structural cost reductions, Fitch expects that negative operating cash flow (ex-working capital adjustments) is likely to deteriorate further in 2006, heightening the risks of a more fundamental restructuring and reduced liquidity (including long-term VEBA holdings) from currently healthy levels.