Moody’s Investors Service has cut the debt rating on General Motors Corp. to Baa2 from Baa1, and lowered the long-term rating of General Motors Acceptance Corp. to Baa1 from A3. The reductions leave GM’s bond ratings two levels above junk.
The auto giant also announced that it has recalled nearly 1.5 million vehicles in North America, reported Reuters. According to the wire service, GM spokesman Alan Adler added that the company has recalled a total of 10.47 million vehicles this year, compared with last year’s total of 7.8 million.
Moody’s downgrade of GM, according to the ratings agency, reflects its expectation that the company’s key credit metrics will remain under pressure through 2005 due to a number of challenges. They include GM’s huge retiree base, which Moody’s fears will put a major strain on the company’s health-care costs and pension-funding requirements. In addition, the company will have a much larger interest burden associated with the $13 billion in debt, mostly was taken on last year, to help fund the company’s U.S. pension plan.
The rating agency is also concerned about continued pricing competition in North America, further progress by Japanese and Korean manufacturers in the domestic truck and SUV market. In addition, Moody’s maintains that GM needs to lower its still-high inventory level in the United States, to reduce its dependence on the daily-rental market, and to allow for the near-term financial resources that will be absorbed by the pending restructuring of its chronically weak European operations.
The rating cut bucks an overall trend toward higher credit quality.
For the third consecutive quarter, rating upgrades outpaced downgrades — this time, by 1.36 to 1, according to Moody’s. “Data suggests that credit quality will be improving over the coming several months, but more so for the intermediate investment-grade companies,” said Moody’s vice president and senior analyst Praveen Varma, in a statement.
Varma also pointed out that 5.6 percent of issuers were on review for upgrade at the end of the third quarter, compared with 2.7 percent a quarter earlier. The share of issuers on review for downgrade remained essentially unchanged at roughly 3.5 percent.