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DJ S&P: 'No One Should Be Taken By Surprise' By Ford, GM Cut
NEW YORK (Dow Jones)--Standard & Poor's, which stunned the corporate bond markets with its downgrades of the two largest U.S. auto companies General Motors Corp. (GM) and Ford Motor Co. (F) to junk status Thursday, said its action shouldn't have been unexpected.
"No one should have been taken by surprise" by the cut in Ford's and GM's ratings, S&P analyst Scott Sprinzen said during a conference call to discuss the ratings. S&P, he said, has been telegraphing its concerns about the two largest U.S. automakers for months.
Earlier, S&P cut the ratings on GM and its financing arm, General Motors Acceptance Corp., two notches to double-B and left the ratings on outlook for more downgrades. It also lowered its ratings on Ford and its finance arm, Ford Motor Credit, by one notch to double-B-plus, also with a negative outlook.
DJ S&P:'No One Should Be Taken By Surprise' By Ford,GM Cut-2
In response to the downgrade, the bonds of the two automakers dropped sharply, though they later recovered some of the ground lost.
The downgrades come as the auto sector, roiled by the U.S. auto makers' poor first-quarter performance, particularly at GM, and the continued slide in their North American market share, had been recovering as bondholders took heart from Kirk Kerkorian's plans to raise his stake in GM to just under 9% via his Tracinda investment company.
The U.S. auto makers' struggles, Sprinzen noted, come as the automotive market overall is actually faring well, with sales of 17.5 million units in North America in April - almost a million more than a year ago. GM's sales, however, fell 7%, and Ford's declined 1.5%.
"This is the good part of the cycle; this isn't the downturn," said Sprinzen. "Against that backdrop these companies have fared poorly."
Sales of sport utility vehicles, Ford and GM's traditional cash cows, slipped markedly, exacerbating concerns about their prospects.
"There's a pronounced weakness in the SUV business," said Sprinzen. "We could theorize about what's going on in SUVs but in the end...what we have is a decline in the segment that represents a significant source of earnings."
Future risks to the companies' ratings come from any erosion in overall market conditions, said S&P analysts, or a slide in the state of the economy.
The auto makers also are under relentless pressure from rising health-care costs and retiree and pension costs. The analysts said that S&P "is skeptical" that either a Washington-based solution or near-term union concessions will emerge to ameliorate the problem.
In the conference call, S&P officials said they didn't expect either Ford or GM to seek to tap the unsecured debt markets any time in the near future, but also noted that they wouldn't expect either company to encounter funding problems in the coming weeks and months.
"However, we are all in unchartered waters and we will continue to watch very closely," Sprinzen said.
Officials pointed to the funding flexibility the two auto companies and their financing arms have, including accessing the securitization market and selling whole loans, entire batches of retail auto loans, for example, to third parties.
GMAC and Ford Motor Credit could, they said, fund their needs almost exclusively by tapping the asset-backed market.
In the statement accompanying GM's downgrade review, S&P noted, however, that if GMAC remains heavily dependent on asset-backed funding, this could hurt unsecured debtholders as it could affect their asset protection.
"Although we have decided not to notch down GMAC's senior unsecured issue ratings from its corporate credit rating at this juncture, we could still do so in the future," S&P said.
Noting that GMAC has been very vocal in calling for a one-notch rating difference between itself and its parent, S&P said that it is "not reassessing (its) criteria for viewing such parent/subsidiary situations, nor do we see any grounds for making a special exception for GM and GMAC."
However, it also noted that GM could restructure the relationship between itself and GMAC to allow GMAC to have a higher rating. Such a move would require the sale of a significant stake in GMAC to a third party, the installation of independent board members and the inclusion of relatively comprehensive and restrictive financial covenants in borrowing agreements. |
