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Moody’s Piles On; Downgrades GM and Ford to Junk

Following the actions earlier in the year by Fitch and S&P (earlier post) Moody's Investors Service lowered the ratings of Ford and GM to junk status.

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:

  1. maintain US market share of approximately 25%;
  2. achieve strong market acceptance and sustain healthy price realization for new products including the T900 light truck and SUV series;
  3. earn automotive pretax profit in excess of $500 million for 2006;
  4. generate at least breakeven automotive operating cash flow before pension, VEBA, GMAC dividends;
  5. 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.

Comments

loudGizmo

It's going to get rougher? Truer words were never said.

The rising cost of gasoline will pose the biggest challenge yet to Ford and GM, as it will take away their ability to hold the overseas competition at bay through the sheer size of their products. They'll now have to go head to head with Toyota, Honda, et al. on very different terms.

Ford and GM certainly can compete with these companies, but it will require a complete culture sea change, something that I have serious doubts they can pull off, particularly in a short timeframe.

stomv

I think the opposite is true.

If GM and/or Ford goes down, it won't be because of their cars. It will be because of the health care for the laborers. GM & Ford promised this health care and yet shelled out the cash to shareholders instead of putting that cash in a fund.

As far as their cars go, I think they'll adapt slowly, but so will the American market. They'll hit their spots, selling big when gas prices undergo a temporary dip, and slowly evolve their vehicles so they are efficient enough for their customers, albeit barely.

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