General Motors’ Credit Ratings Are Lowered

From Reuters

General Motors Corp., battling the worst car sales slump in 10 years, received another dose of bleak news Thursday when two credit-rating agencies downgraded its debt.

Analysts said the moves by Fitch Investors Service Inc. and Duff & Phelps Inc. could lead to higher borrowing costs for the auto maker. The ratings changes apply to both the parent company’s debt and that of its financing arm, GMAC.

Just last week, the world’s largest auto maker announced drastic steps to streamline its U.S. operations so it can return to profitability. It said it will close 21 plants and cut 74,000 jobs over four years.

Duff & Phelps said its rating changes affect about $79 billion worth of bonds and notes, while Fitch said its changes affect about $10.4 billion in senior debt.


The ratings cuts probably will have no impact on GM’s operations but will keep the heat on GM to keep shrinking, analysts said.

Fitch said GM’s cost cutting should strengthen its credit-worthiness but warned that several factors could interfere with the plan.

Fitch cited political resistance to closing plants, stiff competition from overseas auto makers and a shrinking market for new-car buyers as many corporations cut white-collar jobs.

GM’s borrowing costs could rise because of the higher risk that the raters assigned to short-term debt issued by GM and its General Motors Acceptance Corp. Investors could demand higher interest rates to compensate for the increased risk, analysts said.


GMAC is the second-largest issuer of commercial paper behind General Electric Credit Corp. Analysts said the downgrades are not expected to prompt investors to make a mass exodus from GMAC commercial paper.

“It doesn’t preclude most of the investment houses and mutual funds from buying the paper,” said William Steele, an analyst with Dean Witter Reynolds Inc. in San Francisco.

However, the moves could be a precursor to further downgrades, analysts warned.

Two larger credit-rating agencies, Standard & Poor’s Corp. and Moody’s Investors Service Inc., are also considering lowering their ratings on GM debt.


A downgrade by S&P; or Moody’s would be more significant for the car maker, which is struggling to overcome a 12% slide in U.S. car and truck sales and increased Japanese competition.

With 70% of its $79-billion portfolio devoted to auto retail financing, GMAC plays a key role in securing auto loans for GM customers.

If GMAC’s debt were to be downgraded by S&P; or Moody’s to a second-tier rating, many investors would have to reduce their holdings to 1% of assets under Securities and Exchange Commission rules.

One result is that GMAC would be forced to pay higher rates when it borrows, analysts said.


Fitch cut GMAC’s senior debt to A-plus from AA-minus and its notes to F-1 from F-1-plus.

It lowered the senior debt of parent General Motors to A-plus from AA-minus.

In Chicago, Duff & Phelps said it cut the senior and subordinated debt ratings of both GM and GMAC.

GM’s offices were closed for the holiday, and a GM spokesman was unavailable for comment.


GM stock fell 62.5 cents to $28.875 a share on the New York Stock Exchange.