GM, Ford Credit Ratings Lowered to ‘Junk’ Status

Times Staff Writer

Standard & Poor’s Corp. cut to “junk” status the credit ratings of General Motors Corp. and Ford Motor Co. on Thursday, citing an alarming loss in market share for the two biggest U.S. automakers and their heavy dependence on slumping sport utility vehicle sales.

The downgrades, which mean S&P; considers the companies’ debt to be below investment grade in quality, were another blow to GM and Ford’s images on Wall Street.

And although the cuts to junk status had been anticipated for months, the moves still jarred financial markets -- coming just a day after Los Angeles billionaire Kirk Kerkorian boosted optimism about GM by offering $868 million to more than double his stock holdings in the firm.


GM stock, which soared $5.03 on Wednesday, dropped $1.94 to $30.86 on Thursday -- a 6% decline that pushed the price slightly below Kerkorian’s $31-a-share bid for more shares. Ford stock fell 46 cents to $9.70, a decline of almost 5%. Both trade on the New York Stock Exchange.

GM and Ford are the biggest companies to have their credit lowered to junk status, exceeding WorldCom Inc. in 2002.

At S&P;, one of the nation’s three major credit-rating firms, auto industry analyst Scott Sprinzen called GM’s and Ford’s continuing slide in U.S. market share “quite alarming” and expressed concern about the sharp decline in SUV sales, which for years have provided most of their automotive profits.

S&P; cut the long-term debt ratings of GM and its finance arm, General Motors Acceptance Corp., two notches to BB, the second-highest junk rating. The outlook on the new rating is negative, signaling that another downgrade in the next 24 months is possible.

S&P; also cut Ford’s and Ford Motor Credit Co.’s long-term credit ratings one notch to BB-plus, the highest junk rating, also with a negative outlook.

GM last had top AAA ratings from S&P; in 1981; for Ford it was 1980.

A junk rating means GM and Ford could pay much higher interest costs to borrow money but doesn’t indicate that the companies face a dire financial situation in the short term.


Indeed, Sprinzen noted that both companies had ample cash for at least the next several years and said there was no “immediate risk of bankruptcy.”

Ford said it disagreed with the lowered rating, and GM said it was disappointed. Both companies cited their cash holdings as evidence of financial strength.

Still, bond traders said the rating cuts drove prices of many GM and Ford bonds sharply lower, deepening a slide that had accelerated in recent months. The price of one GM bond issue maturing in 2033 slumped to about $740 per $1,000 face value, from $790 on Wednesday, according to Bloomberg News data.

The downgrades cover a combined $290 billion in so-called unsecured GM and Ford debt.

The two other major ratings firms, Moody’s Investors Service and Fitch Ratings, still rate Ford and GM as investment grade, but analysts anticipate more ratings cuts if the automakers don’t show improvement.

GM recently reported a $1.1-billion first-quarter loss, and its 25.6% U.S. market share this year through April is its smallest in nearly 80 years. GM also has not provided a projection of its financial performance for the full year, an unusual action that has left analysts worried that the company sees things worsening.

Ford last month reported a $1.2-billion first-quarter profit, down 38% from a year ago, and the carmaker expects lower earnings for the year.


Ford’s market share has been falling for years and for the first four months of this year stood at 19.2%. Ford and GM each lost about 1 percentage point of market share during that period from a year earlier, while Toyota Motor Corp.’s market share rose 1.5 points to 13.3%.

One immediate problem: Sales of large and mid-size SUVs are down because of aging styling and soaring gas prices. Sales of Ford’s Explorer SUV fell 23% through April, while the number of Expeditions sold declined 25%. Sales of GM’s Chevy Avalanche are down 28% and the Chevy Suburban is off 29%.

Additionally, unit sales of GM’s new Pontiac G6 and the Chevrolet Cobalt compact have failed to meet company expectations, as have sales of Ford’s Five Hundred sedan and Freestyle sport wagon.

S&P; “seems to be very skeptical about these companies’ ability to turn themselves around,” said Craig Hutson, who follows the auto industry for Gimme Credit Publications Inc., a firm specializing in bond analysis.

Yet Kerkorian issued a statement Thursday that said he would press his GM tender offer, which would raise his stake from just under 4% to almost 9%. Although GM’s stock fell below Kerkorian’s bid price of $31 on Thursday, Wall Street generally considers that price to be a near-term floor for the shares.


Times staff writer Tom Petruno contributed to this report and Bloomberg News was used in compiling it.