Fitch Agrees with S&P, Downgrades GM to Junk; Reliance on SUVs a Major Factor

24 May 2005

For the second time in three weeks, GM’s credit rating was cut to junk status by a global rating agency. Fitch Ratings followed Standard & Poor’s action (earlier post), and downgraded GM to BB+ from BBB-.

The action reflects the continuing decline in GM’s North American sales of key mid-size and large SUV products, increasing product and price competition in the large pickup market, and the corresponding impact of these two segments on consolidated profitability. Fitch believes that declining volumes and profitability, coupled with lack of tangible progress in attacking manufacturing and legacy costs will result in negative cash flow through at least 2006.

GM’s sales of mid-size and large SUVs have declined well in excess of 20% YTD, demonstrating a clear trend away from GM’s most significant source of segment profitability. GM is not positioned well in the growing crossover segment, and new product introductions in the car segment have been lower-impact in terms of their impact on consolidated operating results. Volumes and margin in these segments are not expected to offset the large decline in profitability previously achieved on GM's larger vehicles.

Bloomberg reports that Fitch’s decision forces GM bonds out of Lehman’s investment-grade index and into its high-yield index, which may cause investors to dump their holdings. Before Fitch cut, the bonds were to leave the index June 1 and re-enter the index on July 1.

GM Chief Executive Rick Wagoner says profits will improve later this year as new models such as the HHR SUV and a redesigned Chevrolet Impala go on sale.

“The bad news for them is this trend away from SUVs may not be problem with just their models or gas prices,'” said Gimme Credit’s Lombard. “It may be fundamental shift in what consumers are buying.”

Fitch also downgraded Ford, as did S&P, but spared the company from junk status.