S&P; Sinks GM Deeper Into ‘Junk’ Status; GMAC Rating Uncertain

Standard & Poor’s on Monday cut its ratings on General Motors Corp., sending the company deeper into “junk” territory, and warned that the world’s largest automaker might have to restructure its debt if recent trends persisted.

The downgrade puts GM’s ratings deep into the speculative class, a sign of growing risk that the automaker may have trouble repaying all of its debt.

Ratings on GM’s finance arm, General Motors Acceptance Corp., remains on review with “developing” implications, meaning the direction of the rating is uncertain.

The developing status reflects the possibility that GM may sell a controlling stake in GMAC to a highly rated financial institution, S&P; said.

GM has lost nearly $4 billion this year as it battles high healthcare and commodity costs, eroding U.S. market share and slumping sales of its once-profitable sport utility vehicles. The automaker’s consolidated debt outstanding was $285 billion on Sept. 30, S&P; said.

“The changes that will have to occur to turn this company around to cause it to be a profitable auto manufacturer are huge,” said Dan Zaldivar, a fixed income analyst at RBC Capital Markets in Chicago. “This is a very big ship, and it turns very, very slowly.”

S&P; cut GM’s corporate credit rating by two notches to B, five steps below investment grade, from BB-minus. The outlook is negative, meaning the rating is likely to be lowered again over the next two years. S&P;’s rating on GM is the lowest of those of the three major rating firms.

“This year has witnessed a stunning collapse of GM’s financial performance compared with 2004 and initial expectations for 2005,” S&P; said.

Net losses at North American operations could reach $5 billion for the year, even before substantial impairment and restructuring charges, the rating firm said.

An industrywide falloff in demand for sport utility vehicles makes it doubtful that GM’s new models can help restore its North American operations to profitability, S&P; added.

S&P;’s downgrade came the same day bids were expected to buy a controlling stake of GMAC as GM tried to restore the unit’s investment-grade ratings. Borrowing costs at GM and its financial unit have soared since they were first cut to junk status in May.

GM’s bonds with an 8.38% coupon due in 2033 fell to 71.1 cents on the dollar from 73.25 cents Friday, according to MarketAxess.

GM Chief Executive Rick Wagoner has said he will close plants, cut union health benefits and make other changes to reduce North American costs by $7 billion by the end of next year.

“GM has an aggressive strategy to turn around our North American business, and we’ve been making progress in some important areas,” spokeswoman Toni Simonetti said.

GM stands by Wagoner’s statement last month that there is “no plan, strategy or intention for GM to file bankruptcy,” she said.

GM had cash and marketable securities of $19.2 billion at the end of the third quarter.

“We do not see this as an indication that a GM bankruptcy is likely in the short run,” said Pete Hastings, vice president of corporate fixed income at Morgan Keegan Inc. in Memphis, Tenn. “GM’s cash, access to capital markets and salable assets make it less likely in the short run.”

GM shares rose 13 cents to $23.05.