Dallion
05-06-2005, 02:02 PM
Taken from http://www.ecommercetimes.com/story/business/42914.html
A major rating agency declared billions of dollars of debt owed by General Motors (NYSE: GM) and Ford to be "junk," a blow that will increase borrowing costs for the nation's two biggest automakers.
Standard & Poor's Ratings Services downgraded the debt yesterday to below investment grade, or junk status, causing the automakers' stock to tumble on Wall Street and leading the overall market lower.
After falling 5.9 percent yesterday, GM shares rose 24 cents to US$31.10 in early dealing today on the New York Stock Exchange. Ford shares rose 7 cents in early trading on the NYSE after falling 4.5 percent a day earlier.
Another Obstacle
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.
The companies said they disagreed with S&P's decision and said they face no cash crunch.
Still, it amounts to one more hit for the automakers. They 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.
Declining SUV Sales
In the first four months of the year, GM's U.S. sales fell nearly 5 percent and Ford's sales declined 4.2 percent.
S&P said No. 1 General Motors (NYSE: GMH) and No. 2 Ford 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 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 mid-size and large SUVs have plummeted, and industry-wide demand has evidently stalled."
Higher Interest Rates
GM and Ford bonds also fell in value yesterday, and while the companies said 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 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 junk -- or high-yield -- bonds, an asset class known to trade with more volatility and greater risk of default than investment-grade securities.
Dealing with Competitive Disadvantage
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.
© 2005 Associated Press. All rights reserved.
© 2005 ECT News Network. All rights reserved.
A major rating agency declared billions of dollars of debt owed by General Motors (NYSE: GM) and Ford to be "junk," a blow that will increase borrowing costs for the nation's two biggest automakers.
Standard & Poor's Ratings Services downgraded the debt yesterday to below investment grade, or junk status, causing the automakers' stock to tumble on Wall Street and leading the overall market lower.
After falling 5.9 percent yesterday, GM shares rose 24 cents to US$31.10 in early dealing today on the New York Stock Exchange. Ford shares rose 7 cents in early trading on the NYSE after falling 4.5 percent a day earlier.
Another Obstacle
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.
The companies said they disagreed with S&P's decision and said they face no cash crunch.
Still, it amounts to one more hit for the automakers. They 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.
Declining SUV Sales
In the first four months of the year, GM's U.S. sales fell nearly 5 percent and Ford's sales declined 4.2 percent.
S&P said No. 1 General Motors (NYSE: GMH) and No. 2 Ford 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 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 mid-size and large SUVs have plummeted, and industry-wide demand has evidently stalled."
Higher Interest Rates
GM and Ford bonds also fell in value yesterday, and while the companies said 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 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 junk -- or high-yield -- bonds, an asset class known to trade with more volatility and greater risk of default than investment-grade securities.
Dealing with Competitive Disadvantage
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.
© 2005 Associated Press. All rights reserved.
© 2005 ECT News Network. All rights reserved.