GM, Ford Credit Ratings Are at Risk : * Capital: Standard & Poor’s may downgrade them. It could accelerate some plant closings.
Financial woes mounted for General Motors Corp. on Friday as its credit ratings were called into question and it projected that upcoming accounting penalties could technically wipe out its net worth.
Neither development marked a further deterioration of GM’s financial condition, but analysts said the news could hasten another round of plant closings. GM executives say such steps are already in the works.
“There is a lot of pressure on us,” Chairman Robert C. Stempel said in a recent interview. “It’s more near than it is far.”
Standard & Poor’s Corp. placed most of GM’s $90 billion in debt on its “credit watch with negative implications,” signaling that the credit rating of the nation’s largest industrial company might be downgraded.
Even that tentative step will make it moderately more expensive for GM to borrow money, says Joseph Phillippi, auto analyst at Shearson Lehman Bros.
The rating firm did downgrade GM’s preferred stock ratings, to A minus from A. It said GM’s financial performance this year was “far worse” than was assumed when S&P; downgraded GM’s debt last February.
Underscoring the industry-wide nature of GM’s problems, S&P; also placed Ford Motor Co.’s long-term debt and preferred stock on “negative” watch. But the rating firm said Ford’s balance sheet is in better shape than GM’s.
“Of particular concern, losses in North America have reached unprecedented levels,” the firm said of GM. “Although this stems largely from persisting depressed automotive demand and unrelenting price competition, GM’s progress in improving its operating efficiency has been disappointing.”
The judgment was seconded by investment analysts, who said GM hasn’t gone far enough to eliminate excess car-making capacity that has materialized as its share of the U.S. market has been eroded by the Japanese.
“We’re impatient,” said John Casesa, auto analyst at Wertheim Schroder & Co. in New York. “The company is being held back by its gross overcapacity in North America.”
As many as five assembly plants and numerous components plants are considered vulnerable to shutdown. Stempel said the company has specific plans pegged to its target of utilizing 100% of its capacity by the end of 1992. GM has about 150 plants in North America.
“Obviously, implicit in that are some facilities that will be shuttered,” Stempel said.
Separately, GM estimated that new accounting standards being imposed in 1993 on all firms will cost it from $16 billion to $24 billion in a non-cash charge against earnings. The higher figure is roughly equivalent to GM’s net worth.
GM said it hasn’t decided when or over how many years to take the charge, which the Federal Accounting Standards Board is requiring to recognize the obligation companies face for burgeoning health costs for retirees. Until now, the costs were booked as they were paid out.
The change won’t affect a company’s cash position or its income for tax purposes, but it will lower reported net income on its balance sheet. GM said the annual expense, shown as a reduction from earnings, could range from $400 million to $2.6 billion, depending on how it chooses to spread the charges.
Analysts said the new standard is hard on mature companies with large retiree populations protected by generous medical benefits, including GM, Ford and Chrysler Corp.
“The rating agencies have said they will look past this, but it certainly puts smokestack companies in a harsh light,” said Phillippi. “If it in any way raises their cost of capital, that’s a negative.”
