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Go Back   Hummer Forums by Elcova > General Hummer Talk > In the News

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Old 05-06-2005, 09:53 AM
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S&P Cuts Rating
On GM and Ford
To Junk Status

Double Blow Underlines
Big Problems in Detroit,
Adds to Bond-Market Jitters

By LEE HAWKINS JR.
Staff Reporter of THE WALL STREET JOURNAL

May 6, 2005; Page A1

DETROIT -- In a double blow to the U.S. auto industry, Standard & Poor's Corp. yesterday cut its credit ratings on General Motors Corp. and Ford Motor Co., pushing to "junk" status two icons of American business.

S&P, which had warned in recent weeks that both companies could be downgraded, said it reduced the ratings because of increasing doubts about the strategies the companies are following, in particular their heavy reliance on big sport-utility vehicles, sales of which are now falling.

"What we have is a decline in the product segment that represents one of the most substantial sources of earnings for these companies," S&P auto analyst Scott Sprinzen said in a conference call. "They won't be able to look at [midsize] and large SUVs the way they have over the last decade for much of their earnings and cash flow."

The downgrades apply to the car makers and their highly profitable financing arms, General Motors Acceptance Corp. and Ford Motor Credit. Both companies had had the lowest "investment grade" rating of triple-B-minus. S&P cut GM and GMAC two notches to double-B. Ford and its credit arm were lowered one notch to double-B-plus. The ratings agency said the outlook for both companies is "negative." GM has long-term debt outstanding of $291.8 billion; Ford has $161.3 billion.

The twin downgrades are a stark milestone in the long retreat of GM and Ford in the face of relentless competition from nimbler, more-efficient Asian rivals and European brands such as BMW. Despite years of restructuring and waves of new models promoted as "import fighters," the two biggest old-line Detroit auto makers have continued to lose sales and shed jobs. That decline now threatens to accelerate as more nonunion car plants open in the South, and new rivals from South Korea and China gear up to attack the rich U.S. market.

The two companies are burdened by heavy pension and health-care costs for current and retired employees. Their plants are operating at well below capacity. Many of their cars won't sell without deep discounts.

Yesterday's ratings cuts roiled the company's stocks and bonds. Ford's shares fell almost 5% and GM's nearly 6%. The price of a Ford bond maturing in October 2028 fell 5.547 to 71.449, or $72.04 per $1,000 invested, to yield 9.742%. The price of a GM bond maturing in July 2033 fell 4.454 to 74.000, or $56.77 per $1,000 invested, to yield 11.494%.

U.S. auto sales overall surged in April. DaimlerChrysler AG, saw sales of cars and light trucks rise 9%. But sales at GM and Ford declined in the month. Sales of GM's light trucks, which include SUVs and provide the bulk of the company's profit, slid 14%. According to GM, sales of the Chevrolet Suburban and Tahoe, two of its top-selling SUVs, plunged 30% and 34%, respectively, in April.

In his comments, S&P's Mr. Sprinzen zeroed in on the sales decline. "GM's financial performance has been heavily dependent on the profit contributions of its SUVs," he said. "Recently though, sales of its midsize and large SUVs have plummeted, and industrywide demand has evidently stalled, partly because of high gas prices. Also competition has intensified due to a proliferation of new SUVs."

Yet GM, at least, is still counting on SUVs' making a comeback. Chairman and Chief Executive Rick Wagoner is betting heavily that sales of big SUVs will rebound when GM launches several new models. Earlier this year, Mr. Wagoner canceled an effort to develop some new rear-wheel-drive sedans and used the money and engineers freed up by that move to accelerate the arrival of the new SUVs.

While the GM downgrade had long been anticipated, its timing came as a surprise. Just a day earlier, billionaire investor Kirk Kerkorian moved to substantially increase his stake in GM, which was hailed on Wall Street as a positive sign and boosted GM shares. GM's share price dropped yesterday to $30.86, below the $31-per-share amount of Mr. Kerkorian's tender offer for 28 million GM shares. Mr. Sprinzen said the Kerkorian bid adds "uncertainty" to GM's future but that it didn't trigger S&P's downgrade.

Mr. Sprinzen emphasized that he doesn't believe that either auto maker is at risk of defaulting on its debts or of falling into bankruptcy. GM, he noted, has more than $20 billion in cash and access to several billion more in credit lines, while Ford has cash and marketable securities of more than $19 billion.

Both companies have major portions of their substantial cash hoards committed to costs such as health and pension benefits. GM is on track to burn $5 billion in cash this year. The company's "ability to withstand poor financial performance," Mr. Sprinzen said, "is not unlimited."

The ratings cuts hit Ford and GM as they are pursuing repair programs for their many problems. How much the downgrade will hamper those efforts is unclear. The lowered ratings will raise GM's and Ford's costs for borrowing money because they'll have to pay higher interest rates on bonds than they would if they were still considered investment grade. The higher cost of capital will make it that much harder for the companies to keep pace in the price and product-engineering war with healthier Asian and European competitors.

GM spokeswoman Toni Simonetti said the company is "disappointed" by the downgrade. "We know we have challenges in North America. We've been moving aggressively to address these challenges," she said.

Both GM and Ford had been teetering on the brink of a downgrade to junk for months. They had taken measures to cushion themselves against the impact; GM has diversified GMAC's sources of funding. But yesterday's blow still fell and ratcheted up the pressure on the auto makers' chiefs to produce quick results.

In an email to Ford employees, Chairman William Ford said S&P discounted Ford's liquidity and the success of its new vehicles. "We don't share anyone's pessimism," he wrote. "It is our job to prove our critics wrong."

Mr. Wagoner, who recently took responsibility for GM's North American operations, which are losing money, is counting on a "significant re-work" of GM's sales and marketing strategy on the U.S. coasts and the launch of new models to pump up sales.

"We are spending more on products this year. The bulk of that increase is on product here in North America," he said in a recent interview. "Second, we've taken a hard look at future products and made some adjustments to the future product plan with a focus on making sure that the highest priority and resources and capital go to the programs that offer the highest returns. And that's generally a combination of volume and profitability."

Mr. Wagoner said GM plans to focus heavily on large trucks and SUVs and crossovers, "for obvious reasons" -- namely their wider profit margins.

Paul Ballew, GM's chief of industry analysis and sales, insisted that the company sees no "large chunk of evidence" that gas prices are directly hurting SUV sales. A bigger factor, he said, is the natural decline in sales that comes as models reach the end of their life cycle. "In the large utility market, we still have to keep in mind that sales are above where they were five years ago," Mr. Ballew said.

Most of GM's big SUVs -- those accounting for almost two-thirds of the company's full-size SUV sales -- are scheduled to be replaced next year, he noted. There is "no substantial secular decline" in the overall SUV segment, Mr. Ballew said.

At the core of GM's near-term product strategy is a plan to develop products "more on a global basis," Mr. Wagoner said. "North America, like all of our regions, will be a big beneficiary there." GM has closed plants in Maryland, New Jersey and Michigan, and has pushed early retirements on salaried employees, although it hasn't yet resorted to layoffs.

Ford has moved somewhat faster than GM in cutting its production capacity. It recently said it plans to cut North American production in the current quarter by 46,000 vehicles from a year earlier to 905,000 vehicles, a deeper cut than previously forecast. It also told U.S. salaried employees that it plans to cut 1,000 white-collar jobs. Last year, it closed a truck plant after it noticed a softening of large SUV sales.

Besides lower profits from large SUVs, both GM and Ford face the prospect of increasing competition in full-size pickup trucks, the other product line generating significant profits, S&P said. Ford has enjoyed substantial earnings since renewing its F-Series pickups a few years ago, but in the next year or so GM and Toyota will update their large pickups.

Other competitors are emerging. Honda Motor Co. yesterday said it plans to increase by 43% production of its just-launched pickup, the Ridgeline. Honda now aims to build 330 trucks a day, or about 80,000 a year, at its plant in Canada, up from 230 a day or about 56,000 a year.

While acknowledging that the downgrade could increase GM and GMAC's borrowing costs and decrease the two companies' access to the unsecured markets, Ms. Simonetti said the company had "prepared for this possibility. "We believe we have adequate cash and liquidity to fund our businesses for the foreseeable future."
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  #2  
Old 05-06-2005, 09:53 AM
Klaus's Avatar
Klaus Klaus is offline
Hummer Guru
 
Join Date: Nov 2002
Location: CSA
Posts: 2,511
Klaus is an unknown quantity at this point
Default

S&P Cuts Rating
On GM and Ford
To Junk Status

Double Blow Underlines
Big Problems in Detroit,
Adds to Bond-Market Jitters

By LEE HAWKINS JR.
Staff Reporter of THE WALL STREET JOURNAL

May 6, 2005; Page A1

DETROIT -- In a double blow to the U.S. auto industry, Standard & Poor's Corp. yesterday cut its credit ratings on General Motors Corp. and Ford Motor Co., pushing to "junk" status two icons of American business.

S&P, which had warned in recent weeks that both companies could be downgraded, said it reduced the ratings because of increasing doubts about the strategies the companies are following, in particular their heavy reliance on big sport-utility vehicles, sales of which are now falling.

"What we have is a decline in the product segment that represents one of the most substantial sources of earnings for these companies," S&P auto analyst Scott Sprinzen said in a conference call. "They won't be able to look at [midsize] and large SUVs the way they have over the last decade for much of their earnings and cash flow."

The downgrades apply to the car makers and their highly profitable financing arms, General Motors Acceptance Corp. and Ford Motor Credit. Both companies had had the lowest "investment grade" rating of triple-B-minus. S&P cut GM and GMAC two notches to double-B. Ford and its credit arm were lowered one notch to double-B-plus. The ratings agency said the outlook for both companies is "negative." GM has long-term debt outstanding of $291.8 billion; Ford has $161.3 billion.

The twin downgrades are a stark milestone in the long retreat of GM and Ford in the face of relentless competition from nimbler, more-efficient Asian rivals and European brands such as BMW. Despite years of restructuring and waves of new models promoted as "import fighters," the two biggest old-line Detroit auto makers have continued to lose sales and shed jobs. That decline now threatens to accelerate as more nonunion car plants open in the South, and new rivals from South Korea and China gear up to attack the rich U.S. market.

The two companies are burdened by heavy pension and health-care costs for current and retired employees. Their plants are operating at well below capacity. Many of their cars won't sell without deep discounts.

Yesterday's ratings cuts roiled the company's stocks and bonds. Ford's shares fell almost 5% and GM's nearly 6%. The price of a Ford bond maturing in October 2028 fell 5.547 to 71.449, or $72.04 per $1,000 invested, to yield 9.742%. The price of a GM bond maturing in July 2033 fell 4.454 to 74.000, or $56.77 per $1,000 invested, to yield 11.494%.

U.S. auto sales overall surged in April. DaimlerChrysler AG, saw sales of cars and light trucks rise 9%. But sales at GM and Ford declined in the month. Sales of GM's light trucks, which include SUVs and provide the bulk of the company's profit, slid 14%. According to GM, sales of the Chevrolet Suburban and Tahoe, two of its top-selling SUVs, plunged 30% and 34%, respectively, in April.

In his comments, S&P's Mr. Sprinzen zeroed in on the sales decline. "GM's financial performance has been heavily dependent on the profit contributions of its SUVs," he said. "Recently though, sales of its midsize and large SUVs have plummeted, and industrywide demand has evidently stalled, partly because of high gas prices. Also competition has intensified due to a proliferation of new SUVs."

Yet GM, at least, is still counting on SUVs' making a comeback. Chairman and Chief Executive Rick Wagoner is betting heavily that sales of big SUVs will rebound when GM launches several new models. Earlier this year, Mr. Wagoner canceled an effort to develop some new rear-wheel-drive sedans and used the money and engineers freed up by that move to accelerate the arrival of the new SUVs.

While the GM downgrade had long been anticipated, its timing came as a surprise. Just a day earlier, billionaire investor Kirk Kerkorian moved to substantially increase his stake in GM, which was hailed on Wall Street as a positive sign and boosted GM shares. GM's share price dropped yesterday to $30.86, below the $31-per-share amount of Mr. Kerkorian's tender offer for 28 million GM shares. Mr. Sprinzen said the Kerkorian bid adds "uncertainty" to GM's future but that it didn't trigger S&P's downgrade.

Mr. Sprinzen emphasized that he doesn't believe that either auto maker is at risk of defaulting on its debts or of falling into bankruptcy. GM, he noted, has more than $20 billion in cash and access to several billion more in credit lines, while Ford has cash and marketable securities of more than $19 billion.

Both companies have major portions of their substantial cash hoards committed to costs such as health and pension benefits. GM is on track to burn $5 billion in cash this year. The company's "ability to withstand poor financial performance," Mr. Sprinzen said, "is not unlimited."

The ratings cuts hit Ford and GM as they are pursuing repair programs for their many problems. How much the downgrade will hamper those efforts is unclear. The lowered ratings will raise GM's and Ford's costs for borrowing money because they'll have to pay higher interest rates on bonds than they would if they were still considered investment grade. The higher cost of capital will make it that much harder for the companies to keep pace in the price and product-engineering war with healthier Asian and European competitors.

GM spokeswoman Toni Simonetti said the company is "disappointed" by the downgrade. "We know we have challenges in North America. We've been moving aggressively to address these challenges," she said.

Both GM and Ford had been teetering on the brink of a downgrade to junk for months. They had taken measures to cushion themselves against the impact; GM has diversified GMAC's sources of funding. But yesterday's blow still fell and ratcheted up the pressure on the auto makers' chiefs to produce quick results.

In an email to Ford employees, Chairman William Ford said S&P discounted Ford's liquidity and the success of its new vehicles. "We don't share anyone's pessimism," he wrote. "It is our job to prove our critics wrong."

Mr. Wagoner, who recently took responsibility for GM's North American operations, which are losing money, is counting on a "significant re-work" of GM's sales and marketing strategy on the U.S. coasts and the launch of new models to pump up sales.

"We are spending more on products this year. The bulk of that increase is on product here in North America," he said in a recent interview. "Second, we've taken a hard look at future products and made some adjustments to the future product plan with a focus on making sure that the highest priority and resources and capital go to the programs that offer the highest returns. And that's generally a combination of volume and profitability."

Mr. Wagoner said GM plans to focus heavily on large trucks and SUVs and crossovers, "for obvious reasons" -- namely their wider profit margins.

Paul Ballew, GM's chief of industry analysis and sales, insisted that the company sees no "large chunk of evidence" that gas prices are directly hurting SUV sales. A bigger factor, he said, is the natural decline in sales that comes as models reach the end of their life cycle. "In the large utility market, we still have to keep in mind that sales are above where they were five years ago," Mr. Ballew said.

Most of GM's big SUVs -- those accounting for almost two-thirds of the company's full-size SUV sales -- are scheduled to be replaced next year, he noted. There is "no substantial secular decline" in the overall SUV segment, Mr. Ballew said.

At the core of GM's near-term product strategy is a plan to develop products "more on a global basis," Mr. Wagoner said. "North America, like all of our regions, will be a big beneficiary there." GM has closed plants in Maryland, New Jersey and Michigan, and has pushed early retirements on salaried employees, although it hasn't yet resorted to layoffs.

Ford has moved somewhat faster than GM in cutting its production capacity. It recently said it plans to cut North American production in the current quarter by 46,000 vehicles from a year earlier to 905,000 vehicles, a deeper cut than previously forecast. It also told U.S. salaried employees that it plans to cut 1,000 white-collar jobs. Last year, it closed a truck plant after it noticed a softening of large SUV sales.

Besides lower profits from large SUVs, both GM and Ford face the prospect of increasing competition in full-size pickup trucks, the other product line generating significant profits, S&P said. Ford has enjoyed substantial earnings since renewing its F-Series pickups a few years ago, but in the next year or so GM and Toyota will update their large pickups.

Other competitors are emerging. Honda Motor Co. yesterday said it plans to increase by 43% production of its just-launched pickup, the Ridgeline. Honda now aims to build 330 trucks a day, or about 80,000 a year, at its plant in Canada, up from 230 a day or about 56,000 a year.

While acknowledging that the downgrade could increase GM and GMAC's borrowing costs and decrease the two companies' access to the unsecured markets, Ms. Simonetti said the company had "prepared for this possibility. "We believe we have adequate cash and liquidity to fund our businesses for the foreseeable future."
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