Leading car companies are cut to junk
General Motors and Ford, two of America’s industrial icons, were downgraded to junk status on Thursday amid mounting concerns about their ability to stem losses in the intensely competitive US car and truck market.
Standard & Poor’s, the credit rating agency, said the downgrades reflected anxieties about the survival strategies at the two companies, which face a healthcare cost crisis as well as falling sales of sports-utility vehicles, their most profitable lines.
“There’s just been a pile-up of one negative development after another over the last six months,” said Scott Sprinzen, auto analyst at S&P.;
The downgrades, although anticipated, may signal a tightening of credit conditions after a period of easy borrowing. When the second and third biggest corporate borrower in the world goes to junk, it is not just they that have a problem, we all have a problem.
Some investment-grade bond funds could be forced to sell their holdings while the arrival of so much formerly investment-grade debt in the much smaller high-yield market could create disruption. There will be exposure everywhere. This is a real test of what the market can take.
For Ford and GM, junk status will raise their cost of borrowing, an additional burden for the struggling manufacturers.
S&P; said its biggest concern was the slip in demand for the biggest SUVs, as petrol prices rise. Both Ford and GM were “heavily reliant” on large SUVs for their profits, the agency said. Sales of the biggest SUVs fell by a fifth in the first three months of the year.
GM said it was “disappointed” by S&P;’s move. Ford “disagreed” with it. Both companies pointed out they had substantial cash piles.
Largely because of slowing SUV sales, GM’s market share in the US dropped to 25.2 per cent in April from 27.7 per cent a year earlier. Ford’s share slipped to 17.5 per cent from 18.8 per cent.
At their peak 40 years ago, GM, Ford and their smaller Detroit-based rival, Chrysler, made nine out of every 10 cars and trucks sold in the US.
Last month GM revealed a $1.1bn quarterly loss, its biggest since 1992, when the carmaker was on the brink of bankruptcy. Rick Wagoner, chief executive, has taken personal responsibility for efforts to turn round the north American operations. On Wednesday shares in GM rallied on word that Kirk Kerkorian’s Tracinda had offered to increase its stake to 9 per cent.
Shares in GM closed down 5.9 per cent to $30.86. Ford fell 4.5 per cent at $9.70. Delphi and Visteon, parts makers that depend heavily on GM and Ford respectively, also tumbled, by about 7 per cent and 5 per cent respectively. GM’s and Ford’s longest-dated bonds fell about 10 per cent.
GM was downgraded two notches, from BBB-/A-3 to BB/B-1. Ford was cut to BB+/B-1. Both companies remain on negative outlook.
Standard & Poor’s, the credit rating agency, said the downgrades reflected anxieties about the survival strategies at the two companies, which face a healthcare cost crisis as well as falling sales of sports-utility vehicles, their most profitable lines.
“There’s just been a pile-up of one negative development after another over the last six months,” said Scott Sprinzen, auto analyst at S&P.;
The downgrades, although anticipated, may signal a tightening of credit conditions after a period of easy borrowing. When the second and third biggest corporate borrower in the world goes to junk, it is not just they that have a problem, we all have a problem.
Some investment-grade bond funds could be forced to sell their holdings while the arrival of so much formerly investment-grade debt in the much smaller high-yield market could create disruption. There will be exposure everywhere. This is a real test of what the market can take.
For Ford and GM, junk status will raise their cost of borrowing, an additional burden for the struggling manufacturers.
S&P; said its biggest concern was the slip in demand for the biggest SUVs, as petrol prices rise. Both Ford and GM were “heavily reliant” on large SUVs for their profits, the agency said. Sales of the biggest SUVs fell by a fifth in the first three months of the year.
GM said it was “disappointed” by S&P;’s move. Ford “disagreed” with it. Both companies pointed out they had substantial cash piles.
Largely because of slowing SUV sales, GM’s market share in the US dropped to 25.2 per cent in April from 27.7 per cent a year earlier. Ford’s share slipped to 17.5 per cent from 18.8 per cent.
At their peak 40 years ago, GM, Ford and their smaller Detroit-based rival, Chrysler, made nine out of every 10 cars and trucks sold in the US.
Last month GM revealed a $1.1bn quarterly loss, its biggest since 1992, when the carmaker was on the brink of bankruptcy. Rick Wagoner, chief executive, has taken personal responsibility for efforts to turn round the north American operations. On Wednesday shares in GM rallied on word that Kirk Kerkorian’s Tracinda had offered to increase its stake to 9 per cent.
Shares in GM closed down 5.9 per cent to $30.86. Ford fell 4.5 per cent at $9.70. Delphi and Visteon, parts makers that depend heavily on GM and Ford respectively, also tumbled, by about 7 per cent and 5 per cent respectively. GM’s and Ford’s longest-dated bonds fell about 10 per cent.
GM was downgraded two notches, from BBB-/A-3 to BB/B-1. Ford was cut to BB+/B-1. Both companies remain on negative outlook.
May 6, 2005
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