The downgrades affect a total of some $320 billion in debt between the two companies.
Moody’s lowered GM’s rating two levels to Ba2 and the rating on its finance arm to Ba1. The company cut Ford one level to Ba1, one step below investment grade. Moody’s also reduced its rating on Ford Motor Credit Co. to the lowest investment grade.
Ford’s negative outlook recognizes that, in order to meet the operational and competitive challenges it faces, and to achieve the financial benchmarks necessary to support the Ba1 rating, the company will have to successfully execute a number of strategic initiatives...
As the company undertakes these initiatives, market factors beyond its control (higher incentives, rising fuel prices, or an economic slowdown in Europe or the US) could contribute to a more stressful operating environment.
Factors that would contribute to downward pressure on Ford's Ba1 rating include continuing loss of market share in the US which could result from consumer movement away from trucks and SUVs, a further escalation in price competition, a material reduction in the dividend stream available from Ford Credit, or an erosion of Ford’s liquidity.
As for GM:
The negative outlook reflects the potential for the rating to be further lowered should GM fail to successfully implement its North American recovery plan—including achieving healthcare cost relief with the UAW and reducing headcount.
The Ba2 rating anticipates that GM will:
maintain US market share of approximately 25%;
- achieve strong market acceptance and sustain healthy price realization for new products including the T900 light truck and SUV series;
- earn automotive pretax profit in excess of $500 million for 2006;
- generate at least breakeven automotive operating cash flow before pension, VEBA, GMAC dividends;
- maintain gross liquidity (cash and short-term VEBA balances) at or above $20 billion.
As a sidenote on GM’s cost issues, the company recently indicated that it plans to buy $1 billion worth of auto parts a year from India by 2008. That’s up by a factor of 10 from the $120 million in parts a year it currently sources there. (Edmunds)
It’s going to get rougher in Detroit.