Capital Markets

Fitch Cuts GM to Junk

The downgrade, which follows Standard and Poor's similar move of three weeks ago, partly reflects a continuing drop in North American sales of mid-...
Stephen TaubMay 25, 2005

General Motors Corp. has been relegated to the junk heap for the second time in three weeks.

Fitch Ratings downgraded the senior unsecured ratings of the world’s largest car maker to BB-plus from BBB-minus. Fitch also issued the same downgrade GMAC, GM’s finance arm, as well as most of GM’s affiliated entities. The rating Outlook for GM remains negative, Fitch added.

Fitch’s downgrade follows that of Standard Poor’s, which cut GM’s debt to junk status on May 5. The Fitch move “reflects the continuing decline in GM’s North American sales of key mid-size and large SUV products, increasing product and price competition in the large pickup market, and the corresponding impact of these two segments on consolidated profitability,” the ratings agency said in a press release.

Dropping volumes and profitability, “coupled with lack of tangible progress in attacking manufacturing and legacy costs,” should spawn negative cash flow at least through next year, according to Fitch.

The downgrade will knock GM’s bonds out of the widely-tracked Lehman Brothers Holdings benchmark index of investment-grade bonds and into its high-yield index, according to Bloomberg.

That could cause many investors to unload their GM bonds. Before Fitch’s decision, the bonds were slated to leave the investment-grad index June 1 and re-enter it on July 1, according to the news services. “For the guys who had wanted to hold and were banking on the bonds re-entering, they may be forced to sell,” Don McConnell, a bond trader at Mutual of Omaha Investment Management, told Bloomberg.

The value of the entire junk bond market is estimated to be around $600 billion, or one-third that of the investment grade market, according to Bloomberg.

Also on Tuesday, GMAC CFO Sanjiv Khattri reportedly told bond investors in Frankfurt that the finance company is “basically a strong ‘A’ company, but that’s a question for the agencies. Our performance justifies it.”

But Fitch said that the long-term and short-term ratings of GMAC, which were lowered in conjunction with the downgrade of GM, reflect the strong links between the two entities. “Fitch does not believe that GMAC meets criteria at this time to warrant a rating above its parent company,” it added.

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