GM, Ford bonds cut to 'junk' status
S&P drops bond rating for automakers to 'BB,' the second-highest junk rating, citing financial woes.
May 5, 2005
money.cnn.com
NEW YORK (Reuters) - Standard & Poor's cut General Motors and Ford debt to junk status Thursday in a move that will reduce the automakers' avenues for raising funds as they struggle with global competition and rising healthcare costs.
The cuts could raise borrowing costs for the nation's two biggest automakers as investors seek higher rates on the bonds they buy in return for the elevated risk of default.
Investors have dreaded a cut to junk for GM, in particular, for fear it may cause turmoil in the market for investment-grade as well as junk bonds. Investment funds prohibited from owning junk bonds could be forced to sell billions of dollars of GM and Ford debt.
Standard & Poor's cut GM's long-term credit ratings by two notches to "BB," the second highest junk rating. The outlook on the new rating is negative.
"Everybody knows they are facing substantial challenges. It is troubling that they're reduced to non-investment grade, but I can't say it's entirely unexpected," Hugh Johnson, chief investment officer at Johnson Illington Advisors, told Reuters.
"My sense is the downgrade is going to be limited to General Motors and Ford. It's not symptomatic of something that goes beyond the auto industry. It is not a macro-economic issue," he said.
GM has about $300 billion of outstanding long-term debt including secured notes.
GM's management strategies may be ineffective in addressing the company's competitive disadvantages, S&P said in a statement, but the company should have no trouble meeting its cash requirements in the near term.
A GM spokesman said the company was confident in the financial strength of both its automotive and GMAC operations.
"We're disappointed with S&P's decision to lower the credit rating for GM and GMAC," GM spokesman Jerry Dubrowski said. "GM and GMAC have adequate cash and liquidity to fund their business for the foreseeable future."
S&P trimmed Ford's long-term credit ratings by one notch to "BB-plus," the highest junk rating, from "BBB-minus." The outlook on the new rating is negative, meaning another cut is possible over the next two years.
In a statement released Thursday, Ford's Chief Financial Officer Don Leclair echoed GM by criticizing the move by S&P.
"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 told Reuters.
Shares of GM (down $1.94 to $30.86, Research) and Ford (down $0.46 to $9.70, Research) both tumbled on the news, pulling the broader market lower.
GM bonds fell on the news as well, according to a bond market trader, while Treasury bond prices rose as investors sought the perceived safety of government debt.
"I don't think the downgrade itself was tremendously surprising," said John Canavan, an analyst at Stone and McCarthy Research Associates. "Despite that, there is an announcement effect here and a majority of that effect has been a flight bid into Treasuries from the debt market."
The yield on the 10-year Treasury note fell to 4.16 percent from 4.19 percent Wednesday. Bond prices and yields move in opposite directions. |
