S&P Cuts GM Rating Further; Calls Bankruptcy “Not Far-Fetched”

12 December 2005

Standard & Poor’s Ratings Services today lowered its corporate credit rating on General Motors further into junk territory—to B from BB- and its short-term rating to B-3 from B-2—and removed them from CreditWatch, where they were placed on Oct. 3, 2005, “with negative implications.”

According to S&P, “The outlook is negative,” meaning that they are likely to lower the rating again.

The downgrade reflects our increased skepticism about GM’s ability to turn around the performance of its North American automotive operations.

—Robert Schulz, S&P credit analyst

Despite GM’s vehement assertions to the contrary, and despite the company’s substantial liquidity, S&P believes that the possibility of GM filing for bankruptcy “ isn’t a far-fetched possibility if the kind of deterioration in results we’ve seen over the last few quarters should continue.”

S&P bases its assessment on the following:

• GM has suffered meaningful market share erosion in the U.S. this year, despite prior concerted efforts to improve the appeal of its product offerings.

• GM has experienced marked deterioration of its product mix, given precipitous weakening of sales of its mid-size and large SUVs, products that had been highly disproportionate contributors to GM’s earnings.

• The product mix deterioration has partly reflected the aging of GM’s SUV models, but with SUV demand having plummeted industry-wide, particularly during the second half of 2005, S&P doubts whether GM’s new models, set to be introduced over the next year, can be counted on to help restore the company’s North American operations to profitability.

• GM is paring the product scope of its brands. The company has also announced recently that it will be undertaking yet another significant round of production capacity cuts and workforce rationalization. But the benefits of such measures could be undermined unless its market share stabilizes without the company’s resorting again to ruinous price discounting.

• The positive development of the negotiation of an agreement with the UAW to reduce health care costs will only partly address the competitive disadvantage posed by GM’s health care burden.

This year has witnessed a stunning collapse of GM’s financial performance compared with 2004 and initial expectations for 2005. In light of results through the first nine months of 2005, we believe the full-year net loss of GM’s North American operations could approach a massive $5 billion—before substantial impairment and restructuring charges and that the company’s consolidated net loss could total about $3 billion (again before special items).

Last week, GM Chairman and CEO Rick Wagoner took to the Op-Ed pages of the Wall Street Journal to lobby for “a chance to compete on a level playing field.”

Wagoner acknowledged some fault on the product side:

While we’ve been strong in truck sales, we’ve been weaker in cars, and, yes, the recent surge in gas prices hurt sales. While we’ve led in technologies like OnStar, we’ve lagged in others like hybrid vehicles. Rest assured, we’re working hard to address the areas where we lag...No excuses. We will step up our performance in this regard.

But he laid a large share of blame on three other conditions:

• Health care costs. “Foreign auto makers have just a fraction of these costs, because they have few, if any, U.S. retirees, and in their home countries, their governments fund a much greater portion of employee and retiree health-care costs.”

• Litigation costs. “Litigation now costs the U.S. economy more than $245 billion a year, or more than $845 per person. That’s more than 2% of our gross domestic product. No other country has costs anywhere near this level.”

• Unfair trading practices, “especially Japan’s long-term initiatives to artificially weaken the yen.”

What is needed, Wagoner concluded, is not a bailout for GM, but government policies that address those other three issues.