May 5, 2005

Standard & Poor's Cuts Ford and G.M. Debt Rating to Junk Status

DETROIT (AP) -- Standard & Poor's Ratings Services cut its corporate credit ratings to junk status for both General Motors Corp. and Ford Motor Co., a significant blow that will increase borrowing costs and limit fund-raising options for the nation's two biggest automakers.

Shares of both companies fell 5 percent or more after Thursday's downgrades, and the news sent the overall market lower.

The decision by one of the nation's most respected ratings agencies comes as the two iconic American automakers are losing market share at home to Asian automakers, seeing sales soften for their most profitable models and are facing enormous health care and post-retirement liabilities.

The credit ratings agency said its downgrade of GM's long-term rating below investment-grade status reflects its conclusion that management's current strategies may not be effective in dealing with the automaker's competitive disadvantages.

In a statement, GM said it was disappointed with S&P's decision but that it and its finance arm, GMAC, have adequate cash and liquidity to fund their operations ''for the foreseeable future.''

''Clearly, GM has many challenges in North America, but the company is moving aggressively to address these challenges,'' the company said.

S&P said its greatest immediate concern for Ford is the prospect that its sport utility vehicle business will not be able to generate the profitability it's enjoyed historically. Ford's financial performance has been heavily dependent on the earnings of its SUVs but sales of midsize and large SUVs have plummeted of late, S&P said.

''We disagree with S&P's action today,'' said Don Leclair, Ford's executive vice president and chief financial officer. ''We're disappointed that it discounts our considerable liquidity and our access to diverse funding sources, as well as the recent successes of our new products.''

The rating reductions are significant because some big bondholders such as some pension funds are prohibited from buying bonds that are considered by the major rating houses as speculative, or junk. Both GM and Ford had held credit ratings from S&P that were at the lowest level of the agency's investment grade spectrum. As a result of the new ratings, the automakers may have to pay higher rates of interest to attract enough buyers for their bonds.

GM's consolidated debt as of March 31 was $291.8 billion, while Ford's outstanding consolidated debt totaled $161.3 billion.

GM said it had $19.8 billion in cash at the end of the first quarter, and GMAC had $18.5 billion in cash and securities.

Even as it cut their debt ratings, S&P said the outlook was negative for both of the automakers.

The announcement came only a day after billionaire Kirk Kerkorian jolted GM shares higher by offering to invest nearly $870 million in the automaker. Kerkorian's Tracinda Corp. offered to pay $868 million for a nearly 5 percent stake, which would boost Tracinda's holdings to about 9 percent and make Kerkorian one of GM's largest shareholders.

GM shares fell to a 10-year low in April after the company reported a $1.1 billion loss for the first quarter. Its sales have slumped in recent months, including those of its most profitable sport utility vehicles, as gasoline prices marched higher. And while GM executives complain about huge increases in medical insurance costs, the United Auto Workers union has said it's not interested in reopening contract talks before 2007 to address those expenses.

GM shares dropped $1.69, or 5.2 percent, to $31.11 while Ford shares fell 52 cents, or 5.1 percent, to $9.64 in afternoon trading on the New York Stock Exchange.

 
To Rich Gibson's Home Page