GM Debt Grade Cut Nearer to ‘Junk’
Moody’s Investors Service on Tuesday cut General Motors Corp.’s debt rating to a step above “junk” status, citing the automaker’s profit warning last month, and said it might downgrade Ford Motor Co. as well.
The companies’ shares were little changed, but many of their bonds weakened in price. GM, Ford and their subsidiaries have about $375 billion of bond debt outstanding.
GM said last month that it would post its weakest first-quarter earnings since 1992 and that profit this year could fall as much as 80% below its previous forecast. GM is grappling with soaring employee healthcare costs and falling market share.
The company’s U.S. sales have fallen 5.1% through the first three months of 2005 from a year earlier; its market share has dropped to 25.6% from 27.3% for all of 2004.
“GM clearly has no margin for error now,” said Brian Ropp, auto credit analyst at T. Rowe Price in Baltimore.
Moody’s cut GM’s debt ratings to Baa3 from Baa2 and lowered the rating for the company’s finance arm, General Motors Acceptance Corp., to Baa2 from Baa1. The rating service said the outlook for both entities was negative.
Moody’s cited “formidable long-term challenges” for GM’s auto business.
With Moody’s move, GM is rated just one step above junk, with a negative outlook, by all three major credit rating firms.
A downgrade below investment grade by even one rating service could boost GM’s borrowing costs and wreak havoc in the corporate bond market, some analysts say. Many big investors, such as pension funds, aren’t permitted to own junk securities and would have to jettison GM’s bonds.
In the case of Ford and its finance arm, Ford Motor Credit Co., Moody’s said it placed the entities’ ratings under review for possible downgrade. Moody’s cited concern about Ford’s ability to achieve its 2006 profit target of $7 billion before taxes.
Ford faces many of the same problems as GM, including rising healthcare costs and falling U.S. market share. The company’s U.S. sales have declined 5.2% this year.
Moody’s rates Ford’s long-term debt Baa1, three steps above junk, and Ford Motor Credit one notch higher at A3.
Shares of GM fell a cent to $29.04 and Ford’s rose a cent to $11.10, both on the New York Stock Exchange. GM is down 28% this year; Ford is down 24%.
