Fitch Also Cuts GM Credit Rating
Fitch Ratings cut General Motors Corp.’s debt rating Tuesday to “junk,” becoming the second company to rate the world’s largest automaker below investment grade as high gasoline prices eroded its SUV sales.
The downgrade follows a similar move by Standard & Poor’s on May 5 and will cement GM’s junk-credit status, raising borrowing costs and limiting its options for raising funds.
“The long term will be tough for GM,” said Kent White, auto credit analyst at Thrivent Financial in Minneapolis, which owns GM bonds. “The only option they have ahead of them is for a pretty significant restructuring of their North American auto operations.”
Sales of mid-size and large SUVs, a key source of GM’s profit, have dropped more than 20% this year, Fitch said. Weak SUV sales, mounting competition in the truck market and rising costs could cause GM to deplete $6 billion in cash this year, the rating firm said.
The downgrades by Fitch and S&P; mean that GM will fall out of major U.S. bond indexes, forcing investment funds ineligible to hold junk bonds to sell billions of dollars of GM debt.
“Most people were expecting Fitch to cut GM to junk this year, so they did us all a favor and did it sooner rather than later,” said Brian Jacoby, auto credit analyst at Morgan Stanley in New York.
GM and its finance arm had about $292 billion of long-term debt including secured notes as of March 31. The automaker is the largest U.S. debt issuer cut to junk, topping WorldCom, which had $32 billion of debt slashed to junk in 2002.
The Fitch downgrade dashed hopes that GM’s bonds might stay in Lehman Bros. Holdings Inc.’s widely followed credit index. Under new rules that go into effect in July, bonds qualify for the index if two out of three agencies rate them investment grade. GM is still rated the lowest investment grade by Moody’s Investors Service.
GM spokeswoman Toni Simonetti said that the automaker was disappointed by the downgrades and that its finance arm was feeling the pain of the rating actions. She was referring to a run-up in borrowing costs at GM and General Motors Acceptance Corp. since the S&P; downgrade.
The automaker’s liquidity remains strong, with about $38 billion of cash at GM and its finance arm, Fitch said.
Still, GM is facing high hurdles, the rating company said. It needs cash for crucial new products, steel costs will probably remain high through next year and labor strife could ensue as GM tries to trim healthcare costs for employees.
GM’s bond prices fell after the downgrade. Bonds with an 8.38% coupon due in 2033 fell to 72.75 cents on the dollar from 73.5 cents before the Fitch action, according to MarketAxess.
GM shares fell 90 cents to $31.69 on the New York Stock Exchange.
