While GM’s potential credit downgrade to junk status is rattling the markets, Morgan Stanley claims that the reaction is wildly overdone.
In a research report dated last Friday, the bank’s analysts pointed out that they were “astounded” that GM’s credit derivatives were priced 366 basis points higher than BBB-rated corporate bonds at the time. (Relatively GM-friendly Fitch last week downgraded the company to BBB- and said the outlook for the rating was negative.) The analysts contend that investors fear GM’s problems reflect those of the larger economy, a view from which Morgan Stanley strongly dissents. “To us,” the analysts wrote, “GM is a cyclical company in secular decline.”
Maybe so, but isn’t the company's huge reliance on debt in line with that of many other large manufacturers, and isn’t that a problem for them as well at a time when interest rates are expected to rise? The Morgan Stanley analysts acknowledge that critics have taken their methodology to task for failing to include the leverage that GM’s financing arm adds to the company’s overall balance sheet. The analysts also acknowledge that current spreads on GM’s debt may suggest that its credit ratings could “worsen dramatically.”
The fact is, investors wouldn’t be so worried about GM’s operations if it weren’t so highly leveraged. And in that respect, at least, GM isn’t that different from much of the rest of the U.S. economy. Maybe these Morgan Stanley guys should read the views of their firm's own chief economist now and then.