General Motors Debt Downgraded One Level by Moody's (Update4)
Nov. 4 (Bloomberg) -- General Motors Corp.'s debt rating was lowered by Moody's Investors Service one level to Baa2, two steps above non-investment grade, because of competition from Asian carmakers, costs to stem European losses and health expenses, the ratings company said.
Moody's also cut ratings on General Motors Acceptance Corp., the finance unit that generated the automaker's third-quarter net income, one level to Baa1 from A3. The action covers $150 billion in debt. The downgrade is ``not something we welcome, but it doesn't come as a big surprise,'' Chief Executive Rick Wagoner said in an interview at a conference in Boston.
``It's a further confirmation of a deteriorating situation,'' said Dan Genter, president of Los Angeles-based RNC Genter Capital Management, which holds about $2 billion in debt, including bond of General Motors, the world's largest automaker.
Ratings on corporate bonds affect the yield investors pay to purchase bonds. Some bond funds are not permitted to own bonds below investment grade.
New York-based Moody's on Oct. 12 said it was reviewing General Motors' ratings, citing the effect on profit of unsold vehicles in North America, losses in Europe and rising health-care costs. Moody's said today the outlook is stable, meaning a further downgrade isn't being considered.
General Motors, the No. 3 debtor in the benchmark Lehman Credit Index, on Oct. 14 had its Standard & Poor's ratings lowered one level, to BBB-, one step above investment grade, and lower than the rating Moody's assigned today. New York-based S&P said it had concerns about whether the automaker can make a profit on its automotive business.
Ford Ratings
Ford Motor Co., the second-biggest U.S. automaker, had its ratings cut by Standard & Poor's to the lowest investment grade on Nov. 12 last year. Moody's on Oct. 12 affirmed ratings of Baa1 for Ford, and A3 for Ford Motor Credit Co.
General Motors is cutting 12,000 jobs in Europe, about a fifth of its regional workforce, in a bid to stop losses. The company said Oct. 14 it expects costs for the reduction in 2005 and 2006, with 90 percent of the jobs eliminated next year. Chief Financial Officer John Devine that day said on a conference call that ``it's too early to identify'' costs for the Europe actions.
The automaker has ``a large retiree base that leaves the company vulnerable to rising'' health-care costs, Moody's said. Last month, Moody's said annual health expenses are about $5 billion and will be a ``competitive disadvantage'' for General Motors as they continue to rise.
Health, Pension Costs
General Motors may have pension and health costs of $50.6 billion this year, according to a study by Michael Bruynesteyn, an analyst at Prudential Equity Group Inc. in New York. Those costs are down from a peak of $66.2 billion in 2003, he said.
The automaker's U.S. market share this year has declined to 27.7 percent through the first 10 months from 28 percent a year ago as Toyota Motor Corp. and Nissan Motor Co. have gained. Sales through 10 months this year are flat compared with last year.
The company yesterday said fourth-quarter North American car and truck production will be cut to 1.27 million, down 10,000 from its plan a month earlier. The quarterly output would be down 8.3 percent from 1.39 million a year earlier, the company said.
General Motors is getting the bulk of its profit from GMAC, which makes car and truck loans and home mortgages. The last time the company's automotive operations had higher earnings than the finance unit was the fourth quarter of 2002.
The downgrade is significant because of the automaker's reliance on General Motors Acceptance, Genter said. ``It increases their cost of borrowing,'' he said.
General Motors 6 7/8 percent bond maturing in August 2012 rose 0.82 cents on the dollar to 104.11 cents on the dollar, according to Trace, the bond price reporting system of the NASD. The yield fell to 6.2 percent from 6.33 percent.
The shares of General Motors rose $1.20, or 3.1 percent, to $39.50 at 4:16 p.m. in New York Stock Exchange composite trading, and fell as much as 20 cents after the end of regular trading. The shares have declined 23 percent this year. |
