Gm and Ford in trouble:

S&P Cuts GM, Ford Credit Ratings to 'Junk'
Thursday, May 5, 2005 9:45 PM EDT
The Associated Press
By JOHN PORRETTO

A New York rating agency declared billions of dollars of debt owed by General Motors and Ford to be "junk" on Thursday, a significant blow that will increase borrowing costs and limit fund-raising options for the nation's two biggest automakers.

Shares of GM fell almost 6 percent and Ford shares declined 4.5 percent after Standard & Poor's Ratings Services downgraded the debt to below investment grade, which is commonly known as junk or high-yield status.

Both companies responded by saying they face no cash crunch and that they disagreed with the decision by S&P analysts.

Still, it amounts to one more hit for two automakers that are losing market share at home to Asian competitors, seeing sales soften for their most profitable models and facing enormous health care and post-retirement liabilities. GM's U.S. sales fell nearly 5 percent in the first four months of the year and Ford's sales declined 4.2 percent.

In particular, S&P said No. 1 General Motors Corp. and No. 2 Ford Motor Co. can no longer count on generating enormous profits from their sport utility vehicle lineups. Besides higher gas prices, a key factor in slumping SUV sales is the proliferation of smaller, car-based utility vehicles called crossovers _ models that are available from most major automakers today.

"GM's financial performance has been heavily dependent on the profit contribution of its SUVs," said S&P credit analyst Scott Sprinzen. "Recently, though, sales of its midsize and large SUVs have plummeted, and industrywide demand has evidently stalled."

GM and Ford bonds also fell in value Thursday, and while the companies say they have no immediate need for large new debt sales, analysts said they can expect to pay substantially higher interest rates on funds they borrow in the future.

The numbers involved already are enormous: GM paid about $12 billion in interest on debt last year and Ford's tab totaled about $7.1 billion. GM's consolidated debt as of March 31 was $291.8 billion and Ford's totaled $161.3 billion, S&P said.

The two other major debt rating agencies, Moody's Investors Service and Fitch Ratings, still rate the debt of both GM and Ford as investment grade.

Even though it acted alone, the move by S&P will force many institutional investors to reshuffle their portfolios, causing massive selling of GM and Ford bonds at a lesser value. That's because some institutions are banned from dealing in high-yield bonds, an asset class known to trade with more volatility and greater risk of default than investment-grade securities.

S&P said its downgrade of GM's long-term debt reflects its conclusion that the current strategies of GM Chief Executive Rick Wagoner and his management team may not be effective in dealing with the automaker's competitive disadvantages. S&P also cited as concerns GM's European operations, which have been unprofitable since 1999, and weaker demand in what had been a sizzling Chinese market.

However, S&P noted GM should have no difficulty accommodating "near-term cash requirements." It also said GM's highly profitable GMAC finance arm still likely has "sufficient funding flexibility" to support GM even without an investment-grade rating.

In a statement, GM said it was disappointed with S&P's decision but that it and its finance arm have adequate cash and liquidity to fund their operations "for the foreseeable future."

GM said it had $19.8 billion in cash at the end of the first quarter, and GMAC had $18.5 billion in cash and securities. "Clearly, GM has many challenges in North America, but the company is moving aggressively to address these challenges," the company said.

S&P said Ford could be hurt financially by increasing competition from GM and Toyota Motor Corp. in the pickup category. Ford's best-selling vehicles are its F-Series lineup, most notable the full-size F-150 pickup.

Another hindrance for Ford is its relationship with its struggling former parts subsidiary, Visteon Corp. "We assume Ford will have to subsidize in some fashion a radical restructuring of Visteon's operations, at a cost that could well be greater than all the direct support it has already extended," S&P said.

Last month, Ford posted earnings of $1.2 billion, down from $1.95 billion the year before. The company also predicted a tough second quarter, with earnings break-even at best.

Don Leclair, Ford's executive vice president and chief financial officer, said in a statement the company disagreed with S&P's action. "We're disappointed that it discounts our considerable liquidity and our access to diverse funding sources, as well as the recent successes of our new products," Leclair said.

The announcement came only a day after billionaire Kirk Kerkorian jolted GM shares to their largest one-day percentage increase in more than 40 years by offering to invest nearly $870 million in the automaker to boost his stake to about 9 percent.

GM shares dropped $1.94, or 5.9 percent, to $30.86 while Ford shares fell 46 cents, or 4.5 percent, to $9.70 in trading Thursday on the New York Stock Exchange