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A New York rating agency declared billions of
dollars of debt owed by General Motors and Ford to be "junk" on
Thursday. |
A New York rating agency declared billions of dollars of debt owed by
General Motors and Ford to be "junk" on Thursday, a significant blow that
will increase borrowing costs and limit fund-raising options for the
nation's two biggest automakers.
Shares of GM fell almost 6 percent and Ford shares declined 4.5 percent
after Standard & Poor's Ratings Services downgraded the debt to below
investment grade, which is commonly known as junk or high-yield status.
Both companies responded by saying they face no cash crunch and that
they disagreed with the decision by S&P analysts.
Still, it amounts to one more hit for two automakers that are losing
market share at home to Asian competitors, seeing sales soften for their
most profitable models and facing enormous health care and post-retirement
liabilities. GM's U.S. sales fell nearly 5 percent in the first four
months of the year and Ford's sales declined 4.2 percent.
In particular, S&P said No. 1 General Motors Corp. and No. 2 Ford
Motor Co. can no longer count on generating enormous profits from their
sport utility vehicle lineups. Besides higher gas prices, a key factor in
slumping SUV sales is the proliferation of smaller, car-based utility
vehicles called crossovers — models that are available from most major
automakers today.
"GM's financial performance has been heavily dependent on the profit
contribution of its SUVs," said S&P credit analyst Scott Sprinzen.
"Recently, though, sales of its midsize and large SUVs have plummeted, and
industrywide demand has evidently stalled."
GM and Ford bonds also fell in value Thursday, and while the companies
say they have no immediate need for large new debt sales, analysts said
they can expect to pay substantially higher interest rates on funds they
borrow in the future.
The numbers involved already are enormous: GM paid about $12 billion in
interest on debt last year and Ford's tab totaled about $7.1 billion. GM's
consolidated debt as of March 31 was $291.8 billion and Ford's totaled
$161.3 billion, S&P said.
The two other major debt rating agencies, Moody's Investors Service and
Fitch Ratings, still rate the debt of both GM and Ford as investment
grade.
Even though it acted alone, the move by S&P will force many
institutional investors to reshuffle their portfolios, causing massive
selling of GM and Ford bonds at a lesser value. That's because some
institutions are banned from dealing in high-yield bonds, an asset class
known to trade with more volatility and greater risk of default than
investment-grade securities.
S&P said its downgrade of GM's long-term debt reflects its
conclusion that the current strategies of GM Chief Executive Rick Wagoner
and his management team may not be effective in dealing with the
automaker's competitive disadvantages. S&P also cited as concerns GM's
European operations, which have been unprofitable since 1999, and weaker
demand in what had been a sizzling Chinese market.
However, S&P noted GM should have no difficulty accommodating
"near-term cash requirements." It also said GM's highly profitable GMAC
finance arm still likely has "sufficient funding flexibility" to support
GM even without an investment-grade rating.
In a statement, GM said it was disappointed with S&P's decision but
that it and its finance arm have adequate cash and liquidity to fund their
operations "for the foreseeable future."
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. "Clearly, GM has many
challenges in North America, but the company is moving aggressively to
address these challenges," the company said.
S&P said Ford could be hurt financially by increasing competition
from GM and Toyota Motor Corp. in the pickup category. Ford's best-selling
vehicles are its F-Series lineup, most notable the full-size F-150 pickup.
Another hindrance for Ford
is its relationship with its struggling former parts subsidiary, Visteon
Corp. "We assume Ford will have to subsidize in some fashion a radical
restructuring of Visteon's operations, at a cost that could well be
greater than all the direct support it has already extended," S&P
said.
Last month, Ford posted earnings of $1.2 billion, down from $1.95
billion the year before. The company also predicted a tough second
quarter, with earnings break-even at best.
Don Leclair, Ford's executive vice president and chief financial
officer, said in a statement the company disagreed with S&P's action.
"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," Leclair said.
The announcement came only a day after billionaire Kirk Kerkorian
jolted GM shares to their largest one-day percentage increase in more than
40 years by offering to invest nearly $870 million in the automaker to
boost his stake to about 9 percent.
GM shares dropped $1.94, or 5.9 percent, to $30.86 while Ford shares
fell 46 cents, or 4.5 percent, to $9.70 in trading Thursday on the New
York Stock Exchange.
(AP) |