GM and Ford bonds reduced to "junk" status
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GM and Ford bonds reduced to "junk" status
The debt of General Motors Corp. and Ford Motor Co. was lowered to "junk status" Thursday as one of the nation's top credit rating agencies said the management strategies at both firms are insufficient to counter mounting challenges and surging rivals.
The move by Standard & Poor's Corp. is another blow to the wobbling automotive giants that are being hurt by sinking U.S. sales and market share, slowing demand for profitable SUVs and big pickups, and rising health care and pension costs.
Downgrading the credit ratings of GM and Ford to below investment grade -- so-called junk status -- will increase borrowing costs and limit the fund-raising options of the nation's two largest automakers.
The move, which had been expected on Wall Street, sent the firms' stocks plunging only a day after rallying when billionaire Kirk Kerkorian offered to raise his stake in GM to 8.8 percent. GM shares closed down $1.94, or nearly 6 percent, at $30.86 on Thursday. Ford shares dropped 46 cents, or 4.53 percent, to $9.70.
GM said it was disappointed in the downgrade but said it was moving aggressively to address challenges and had ample cash on hand to fund its operations for the foreseeable future.
Ford Chairman and CEO Bill Ford Jr., in an e-mail to employees, called the downgrade unwelcome but vowed Ford would be more aggressive in driving down costs and taking other measures to counter its challenges. "We don't share anyone's pessimism," Bill Ford said. "It's our job to prove our critics wrong."
GM and Ford, icons of U.S. industry with combined 2004 sales of $365 billion, are the biggest firms to be downgraded to junk status, exceeding WorldCom Inc. in 2002.
GM, with debt of $291.8 billion, had its rating lowered two notches below investment grade and Ford, with debt of $161.3 billion, was lowered one notch below speculative grade.
S&P cited slumping demand for big SUVs and market share losses, especially in the lucrative sport utility vehicle and pickup segments, even as total industry vehicle sales have increased.
Demand for some of the biggest SUV models offered by GM and Ford has dropped as much as 30 percent this year.
"What we have is a decline in the product segment that represents one of the most substantial sources of earnings for both companies and there's the risk that will continue," S&P analyst Scott Sprinzen said.
He warned that competition could intensify in the pickup segment when GM introduces full-size models in 18 to 24 months, and Toyota Motor Corp. launches a model in the same period.
Although Standard & Poor's downgrade came just a day after Kerkorian made his tender offer to buy enough GM shares to make him the automaker's third largest shareholder, Sprinzen said the timing of the announcement was a coincidence. But he said Kerkorian's offer adds "uncertainty" to GM's future.
Rising costs for employee benefits, notably health care, and raw materials also helped trigger the downgrades.
Standard & Poor's expressed skepticism the companies will receive any concessions on soaring health care costs from the United Auto Workers or the federal government. And the agency questioned whether extensive cost-cutting in North America in recent years has improved the competitive standing of GM and Ford.
"They have some shrinking that needs to be done in terms of assembly plants and manpower," Sprinzen said. "Profitability could remain poor for the rest of this year, and prospects for a return to adequate profitability in the next few years are becoming increasingly uncertain."
GM and Ford aren't at risk of defaulting on debuts or falling into bankruptcy, Sprinzen said, because of substantial cash levels -- more than $20 billion at GM and more than $19 billion at Ford.
But GM's overall earnings have deteriorated precipitously, including an alarming $1.1 billion first-quarter loss. It will burn through $5 billion in cash this year and the company's "ability to withstand poor financial performance is not unlimited," Sprinzen added.
Standard & Poor's is also concerned about GM's unfunded retiree medical liability, which jumped to $61 billion at the end of 2004 from $57 billion at the end of 2003.
"Unless the automotive operations' cash generating ability improves," Sprinzen said, "GM's burdensome postretirement benefit obligations could become even more onerous."
The downgrades had long been telegraphed by Standard & Poor's, and the specter of similar moves by other agencies such as Fitch Ratings and Moody's Investors Service hangs like a Damocles sword over the automakers.
Bond markets anticipated the downgrades for some time, with the so-called "spread" between the yield in GM and Ford bonds and government bonds widening to reflect the expected weaker rating that will make it more expensive for the companies to float bonds to raise cash.
Over the short term, that probably won't change much, said Brett Hoselton, an analyst with KeyBanc Capital Markets in Cleveland, Ohio. But the longer the automakers' credit ratings wallow in junk status, the worse it could get, primarily for their finance units, which depend on the bond market to raise money to loan consumers for new car and truck purchases.
The automakers can become "potentially less competitive in terms of loan rates," said Hoselton. "Your incentive spending would have to go up significantly to keep your loan rates competitive."
Any hit to the competitiveness of GMAC or Ford Motor Credit would be devastating to the companies since the finance companies are currently contributing the bulk of the automakers' profits.
GMAC's profits have fallen from recent record levels. In the first quarter, the unit earned $728 million, a $36 million decline from 2004, in large part because of GM's declining sales and rising interest rates.
Still, GMAC remains a major source of cash generation for GM and finances about half of all its vehicle sales. On Wednesday, GM placed GMAC's residential mortgage business into a holding company, in part, to separate the lucrative business from its more volatile automotive finance unit.
In making an offer to acquire a major chunk of GM shares, analysts speculate Kerkorian wants to gain control of GMAC and make it a separate entity.
But analysts discount any talk of GM or Ford spinning off their finance units. "While you would be unlocking value, you would also be sentencing the automotive operations to oblivion," Hoselton said.
In addition to falling U.S. sales and the same challenges facing GM, Ford must foot a substantial bill to bail out Visteon Corp., its former automotive parts unit.
Visteon continues to rack up losses, burn through cash and is in restructuring talks with Ford that will substantially downsize the company. Ford has already provided $400 million in financial relief to Visteon this year.
"We assume Ford will have to subsidize in some fashion a radical restructuring of Visteon's operations, at a cost that could well be greater than all the direct support it has already extended," Sprinzen said.
Despite S&P's downbeat view on GM and Ford, Prudential Equity Group analyst Michael Bruynesteyn expressed markedly more optimism about the auto industry's prospects. In a new note to investors, he said the combination of falling steel prices, an expected recovery in vehicle sales and resulting lowered inventories "could set up 2006 for solid vehicle production (and earnings)."
Despite the stigma of having their credit ratings lowered to junk status, KeyBanc's Hoselton noted GM and Ford still have plenty of cash to pay their bills.
"It's not to the point," Hoselton said, "where GM and Ford are going to be C.O.D."
Ford and GM became high credit risks after Standard & Poor's lowered their debt ratings to junk status. A number of factors drove the move, some affecting both automakers, others unique to each company.
Pension obligations and health care costs for employees and retirees continue to soar.
Rising gas prices and increased competition are driving down demand for high-profit SUVs. Continuing market share losses in North America are hurting profits as consumers are increasingly buying import models.
Rigorous cost-cutting has not been enough to improve either automaker's competitive standing. GM and Ford have cut extra factory capacity and eliminated jobs, but the efficiency gains and cost savings don't offset market share losses and rising benefits costs, especially health care.
Overseas operations are not making up for problems in North America. GM has lost money in Europe since 1999. Sweeping reorganizations of Ford's European and Latin American operations have not resulted in strong profits. Ford's Premier Automotive Group, which includes Volvo, Jaguar and Land Rover, has not been a strong performer.
Competition is heating up in the pickup market -- the only major source of automotive profit for GM and Ford.
Earnings from the automakers' highly profitable financing units are under pressure as interest rates rise.
GM's financial performance has proven volatile and unpredictable. After reporting a $1.1 billion loss in the first three months of the year, GM's prospects for restoring consistent, strong profits within a few years seem uncertain.
Visteon, Ford's ailing former parts unit, continues to be a drain on the automaker. Ford will likely have to subsidize in some way a radical restructuring of Visteon's operations.
GM and Ford have plenty of cash on hand to fund operations in the near term. But over time, they face higher borrowing costs, undermining their ability to keep pace in the brutal price and product development battle with healthier European and Asian rivals.
http://www.detnews.com/2005/autosins...A01-173553.htm
And as usual with articles from The Detroit News, there's a bunch of additional info at that link.
The move by Standard & Poor's Corp. is another blow to the wobbling automotive giants that are being hurt by sinking U.S. sales and market share, slowing demand for profitable SUVs and big pickups, and rising health care and pension costs.
Downgrading the credit ratings of GM and Ford to below investment grade -- so-called junk status -- will increase borrowing costs and limit the fund-raising options of the nation's two largest automakers.
The move, which had been expected on Wall Street, sent the firms' stocks plunging only a day after rallying when billionaire Kirk Kerkorian offered to raise his stake in GM to 8.8 percent. GM shares closed down $1.94, or nearly 6 percent, at $30.86 on Thursday. Ford shares dropped 46 cents, or 4.53 percent, to $9.70.
GM said it was disappointed in the downgrade but said it was moving aggressively to address challenges and had ample cash on hand to fund its operations for the foreseeable future.
Ford Chairman and CEO Bill Ford Jr., in an e-mail to employees, called the downgrade unwelcome but vowed Ford would be more aggressive in driving down costs and taking other measures to counter its challenges. "We don't share anyone's pessimism," Bill Ford said. "It's our job to prove our critics wrong."
GM and Ford, icons of U.S. industry with combined 2004 sales of $365 billion, are the biggest firms to be downgraded to junk status, exceeding WorldCom Inc. in 2002.
GM, with debt of $291.8 billion, had its rating lowered two notches below investment grade and Ford, with debt of $161.3 billion, was lowered one notch below speculative grade.
S&P cited slumping demand for big SUVs and market share losses, especially in the lucrative sport utility vehicle and pickup segments, even as total industry vehicle sales have increased.
Demand for some of the biggest SUV models offered by GM and Ford has dropped as much as 30 percent this year.
"What we have is a decline in the product segment that represents one of the most substantial sources of earnings for both companies and there's the risk that will continue," S&P analyst Scott Sprinzen said.
He warned that competition could intensify in the pickup segment when GM introduces full-size models in 18 to 24 months, and Toyota Motor Corp. launches a model in the same period.
Although Standard & Poor's downgrade came just a day after Kerkorian made his tender offer to buy enough GM shares to make him the automaker's third largest shareholder, Sprinzen said the timing of the announcement was a coincidence. But he said Kerkorian's offer adds "uncertainty" to GM's future.
Rising costs for employee benefits, notably health care, and raw materials also helped trigger the downgrades.
Standard & Poor's expressed skepticism the companies will receive any concessions on soaring health care costs from the United Auto Workers or the federal government. And the agency questioned whether extensive cost-cutting in North America in recent years has improved the competitive standing of GM and Ford.
"They have some shrinking that needs to be done in terms of assembly plants and manpower," Sprinzen said. "Profitability could remain poor for the rest of this year, and prospects for a return to adequate profitability in the next few years are becoming increasingly uncertain."
GM and Ford aren't at risk of defaulting on debuts or falling into bankruptcy, Sprinzen said, because of substantial cash levels -- more than $20 billion at GM and more than $19 billion at Ford.
But GM's overall earnings have deteriorated precipitously, including an alarming $1.1 billion first-quarter loss. It will burn through $5 billion in cash this year and the company's "ability to withstand poor financial performance is not unlimited," Sprinzen added.
Standard & Poor's is also concerned about GM's unfunded retiree medical liability, which jumped to $61 billion at the end of 2004 from $57 billion at the end of 2003.
"Unless the automotive operations' cash generating ability improves," Sprinzen said, "GM's burdensome postretirement benefit obligations could become even more onerous."
The downgrades had long been telegraphed by Standard & Poor's, and the specter of similar moves by other agencies such as Fitch Ratings and Moody's Investors Service hangs like a Damocles sword over the automakers.
Bond markets anticipated the downgrades for some time, with the so-called "spread" between the yield in GM and Ford bonds and government bonds widening to reflect the expected weaker rating that will make it more expensive for the companies to float bonds to raise cash.
Over the short term, that probably won't change much, said Brett Hoselton, an analyst with KeyBanc Capital Markets in Cleveland, Ohio. But the longer the automakers' credit ratings wallow in junk status, the worse it could get, primarily for their finance units, which depend on the bond market to raise money to loan consumers for new car and truck purchases.
The automakers can become "potentially less competitive in terms of loan rates," said Hoselton. "Your incentive spending would have to go up significantly to keep your loan rates competitive."
Any hit to the competitiveness of GMAC or Ford Motor Credit would be devastating to the companies since the finance companies are currently contributing the bulk of the automakers' profits.
GMAC's profits have fallen from recent record levels. In the first quarter, the unit earned $728 million, a $36 million decline from 2004, in large part because of GM's declining sales and rising interest rates.
Still, GMAC remains a major source of cash generation for GM and finances about half of all its vehicle sales. On Wednesday, GM placed GMAC's residential mortgage business into a holding company, in part, to separate the lucrative business from its more volatile automotive finance unit.
In making an offer to acquire a major chunk of GM shares, analysts speculate Kerkorian wants to gain control of GMAC and make it a separate entity.
But analysts discount any talk of GM or Ford spinning off their finance units. "While you would be unlocking value, you would also be sentencing the automotive operations to oblivion," Hoselton said.
In addition to falling U.S. sales and the same challenges facing GM, Ford must foot a substantial bill to bail out Visteon Corp., its former automotive parts unit.
Visteon continues to rack up losses, burn through cash and is in restructuring talks with Ford that will substantially downsize the company. Ford has already provided $400 million in financial relief to Visteon this year.
"We assume Ford will have to subsidize in some fashion a radical restructuring of Visteon's operations, at a cost that could well be greater than all the direct support it has already extended," Sprinzen said.
Despite S&P's downbeat view on GM and Ford, Prudential Equity Group analyst Michael Bruynesteyn expressed markedly more optimism about the auto industry's prospects. In a new note to investors, he said the combination of falling steel prices, an expected recovery in vehicle sales and resulting lowered inventories "could set up 2006 for solid vehicle production (and earnings)."
Despite the stigma of having their credit ratings lowered to junk status, KeyBanc's Hoselton noted GM and Ford still have plenty of cash to pay their bills.
"It's not to the point," Hoselton said, "where GM and Ford are going to be C.O.D."
Ford and GM became high credit risks after Standard & Poor's lowered their debt ratings to junk status. A number of factors drove the move, some affecting both automakers, others unique to each company.
Pension obligations and health care costs for employees and retirees continue to soar.
Rising gas prices and increased competition are driving down demand for high-profit SUVs. Continuing market share losses in North America are hurting profits as consumers are increasingly buying import models.
Rigorous cost-cutting has not been enough to improve either automaker's competitive standing. GM and Ford have cut extra factory capacity and eliminated jobs, but the efficiency gains and cost savings don't offset market share losses and rising benefits costs, especially health care.
Overseas operations are not making up for problems in North America. GM has lost money in Europe since 1999. Sweeping reorganizations of Ford's European and Latin American operations have not resulted in strong profits. Ford's Premier Automotive Group, which includes Volvo, Jaguar and Land Rover, has not been a strong performer.
Competition is heating up in the pickup market -- the only major source of automotive profit for GM and Ford.
Earnings from the automakers' highly profitable financing units are under pressure as interest rates rise.
GM's financial performance has proven volatile and unpredictable. After reporting a $1.1 billion loss in the first three months of the year, GM's prospects for restoring consistent, strong profits within a few years seem uncertain.
Visteon, Ford's ailing former parts unit, continues to be a drain on the automaker. Ford will likely have to subsidize in some way a radical restructuring of Visteon's operations.
GM and Ford have plenty of cash on hand to fund operations in the near term. But over time, they face higher borrowing costs, undermining their ability to keep pace in the brutal price and product development battle with healthier European and Asian rivals.
http://www.detnews.com/2005/autosins...A01-173553.htm
And as usual with articles from The Detroit News, there's a bunch of additional info at that link.
