General Motors Company (NYSE:GM) is dealing with a recall of faulty ignition switches in 1.6 million vehicles. According to Fitch Ratings, this poses a reputation risk for the auto giant and the follow-on costs could mount. Fitch said in a release on March 14th that the federal probe examining the length of time it took GM to announce the recall and near-continuous stream of negative headlines related to the recall could only make the situation worse.
Fitch said that it does not expect the recall to have an effect on GM’s ratings or outlook though. The direct costs associated with the recall and the associated fines will likely be manageable and would not affect the company’s credit profile. Fitch is estimating that the cost of the recall could be less than $100 million. Fitch views GM’s offer of a $500 incentive towards the purchase of a new vehicle will have a limited financial impact on the company.
The National Highway Traffic Safety Administration (NHTSA) may cap a fine at $35 million, which Fitch views as manageable. The lawsuits connected to the accidents that occurred prior to GM’s 2009 bankruptcy may be considered prepetition claims. The actual damages will depend on how the courts view the claims and the legal avenues that might be available to plaintiffs.
General Motors will also have to pay legal costs associated with its own internal investigation. Another way that GM has to pay for the recall is based on the amount of time that senior management will be spending time focusing on it. GM is restructuring its management team and the recall could affect the launch of new vehicles.