The Bush Administration’s $17.4 billion bailout of General Motors and Chrysler may prove to be a lightly applied Band-Aid, judging from reports issued Friday by Fitch Ratings.

Fitch downgraded the Issuer Default Rating (IDR) of both car companies to “C,” indicating that “default is imminent.” The rating agency said the action reflects the terms of federal government assistance that were announced earlier in the day, which include a reduction in the company’s current debt load.

“Debt reduction is expected to take the form of a distressed debt exchange, which is a default under Fitch’s methodology, although how the exchange is to be accomplished remains highly uncertain,” Fitch said in separate reports on the two auto makers. It did not address Ford Motor’s situation.

Fitch said the ability of GM and Chrysler to use equity to address debt and VEBA obligations is very limited, given the size of the obligations. In GM’s case, it also cited the auto maker’s current market capitalization. In the case of Chrysler, Fitch also cited the company’s limited enterprise value.

“The threat of a bankruptcy remains, given the terms of the federal assistance, and the maturity,” said Fitch. It added that it expects the current agreement will be significantly restructured prior to its maturity.

Fitch also noted that recovery ratings for unsecured holders could move down further from current estimates of 10 percent to 30 percent.

Under GM’s plan, unsecured holders could lose 50 percent immediately under a distressed debt exchange. Recoveries will also be impaired by the potential elimination of any remaining value ascribed to GM’s equity interest in GMAC, and the fact that government loans — or loan guarantees — will be placed in a senior position to exiting unsecured debt.

“Changes to other liabilities, such as health care, and other changes to GMs cost structure will also be factored into the recovery analysis as details become available,” Fitch added.

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