S&P cuts both Ford and GM's bond ratings to Junk status

[Marc]

From MarketWatch

S&P cuts GM's bond rating to junk
By Shawn Langlois, MarketWatch
4:54 PM ET May 5, 2005

SAN FRANCISCO (MarketWatch) - Ratings concern Standard & Poor's, in a widely expected move, cut its credit rating on General Motors Corp. to "junk" status Thursday, a day after the automaker's shares turned in a historic rally.

GM's stock (GM: news, chart, profile) finished the busy trading day down $1.94, or 5.9%, to close at $30.86 after jumping 18% on Wednesday in reaction to Kirk Kerkorian's bid to double his stake in GM.

"The downgrade to non-investment-grade reflects our conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages," S&P said in a note.

General Motors and all related entities had their ratings cut two notches to BB from BBB.

The move affects about $300 billion of debt from the world's biggest car maker. Labeling GM's bonds non-investment grade will also drive up the company's cost of doing business, making it more expensive for it to borrow money in the financial market.

"GM is firmly committed to improving its performance as quickly as possible, and today's decision will not deter GM from achieving its objectives," said GM spokesman Jerry Dubrowski.

The downgrade follows months of slumping sales, shrinking market share, and a share price that had fallen to a 12-year low, pushing the yield on GM's long-term bonds to their highest level in two years.

GM, the biggest issuer of corporate bonds in the U.S., has taken steps ranging from shuffling the top brass at its North American operations to pleading with union officials about reducing health-care costs. The company also pulled its ads from the Los Angeles Times when it didn't like what the newspaper had to say.

Ahead of the downgrade, the move had been mostly priced in to the bonds, which for months have been trading in line with other issues rated as "junk". In some cases, spreads for GM bonds have even been wider than other "junk" bonds. See full bond story.

The company's bonds will likely feel increased pressure as investment-grade portfolio managers could be forced to unload their General Motors holdings since they no longer meet their standards.

[Jennifer Kirley]

I can't help but harken back to the 1970s.

Gas prices affect so much of our economy. When the economy was hot and gas prices low, big trucks and SUVs became the must-haves of autos. This was largely not from their utility because so much of sales were to people who wouldn't be using them for rough conditions. So cars, trucks and SUVs (the vehicular "tweeners") reflected the times in their design and marketing.

Demand has been declining for awhile, but in the last few years strong incentives (and tax breaks, we must recall) have kept sales going for some of the big vehicles that now sit on the lots.

Meanwhile, the automakers cried foul when mention of raising overall gas mileage was made.

Environmental (gas prices, wage pressures) changes can happen much faster than retooling and making new lines of cars, even though new lines can come out faster now than in the 70s. Add to that the fact that there are so many later model vehicles in use from all those incentives, a new purchase can often be delayed for awhile.

Of course they will blame pensions and health insurance costs for their troubles. Perhaps they will eventually go the route of airliners, and declare bankruptcy so they can dump these commitments.

Pension and health care cost woes are certainly grievious problems but they should be addressed on a wholescale basis because they aren't an industry problem.

Overall I have very little sympathy for automotive corporations who have based their strategy on the basis that GM and Ford have done. They have appeared to be avoiding reality (as in the law of gravity) for some time.

[Marc]

Originally Posted by Jennifer Kirley

Overall I have very little sympathy for automotive corporations who have based their strategy on the basis that GM and Ford have done. They have appeared to be avoiding reality (as in the law of gravity) for some time.

I have NO sympathy for them at all. Of course, QS-9000 and TS 16949 were supposed to solve so many problems...

[Jennifer Kirley]

Originally Posted by Marc

I have NO sympathy for them at all. Of course, QS-9000 and TS 16949 were supposed to solve so many problems...

Perhaps they did solve a lot of problems. That's the thing about those standards and indeed, quality, environmental and safety programs in general--you can't be sure what evils were avoided. That's why the prevention concept is such a hard sell.

But in any case the standards don't cover the ground of deciding what strategy to pursue. They can't, and indeed shouldn't. Arrogance still needs to be shaken up good from time to time, and I suppose this is an example of it happening.

[Wes Bucey]

S&P thought GM might be lonely in the junk yard!

This is almost like a Greek tragedy where the gods punish the hubris of the main characters for presuming they could "make their own rules of conduct."

S&P cuts GM and Ford to junk status By Dan Wilchins
Thu May 5, 6:05 PM ET

NEW YORK (Reuters) - Standard & Poor's on Thursday cut its ratings on about $290 billion of General Motors Corp. (NYSE:GM - news) and Ford Motor Co. (NYSE:F - news) bonds to junk, jolting financial markets and further hampering the automakers as they grapple with brutal competition.
The downgrades, the largest ever of their kind, sent stocks and the U.S. dollar lower, while safe-haven Treasury bond prices jumped.

"Junk," or speculative-grade bonds slumped as investors braced for the market to grow by as much as 15 percent in short order. With junk ratings, the automakers have fewer avenues for raising funds because many large institutional investors cannot buy speculative-grade debt. These types of issuers are deemed more likely to default.

Both companies said they were disappointed with the action.

The companies' shares and bonds dropped about 5 percent and the cost of protecting Ford and GM debt against default surged. The cuts to junk were expected, but came much sooner than investors had anticipated.

The automakers are struggling with high health-care, pension and materials costs. At the same time, vehicles made by foreign automakers have captured a growing share of the U.S. auto market from the Big Two.

"I don't see anything helping them out now. I don't see any rays of sunshine," said Wilmer Stith, who helps manage some $2 billion of bonds at MTB Investment Advisors in Baltimore. MTB has small holdings of General Motors bonds.

GM and Ford reported lower April U.S. vehicle sales on Tuesday, even as Toyota Motor Corp.'s (7203.T) U.S. sales rose 21 percent from last year for its best month ever.

GM and Ford's sports utility vehicle and truck sales fell. Those vehicles have provided the automakers with most of their auto-related profits since the late 1990s, but have become less attractive as gasoline prices have climbed.

Ford's shares closed down 46 cents, or 4.53 percent, at $9.70 on the New York Stock Exchange. GM's shares fell $1.94, or 5.91 percent, to $30.86.

OUTLOOK NOT ENTIRELY BAD

Many investors fear the junk bond market could be overwhelmed by GM and Ford debt. But some analysts say fears of excessive selling are overblown.

Some analysts noted that the S&P news was not all bad. The companies have ample cash for at least the next several years, and although they will have trouble issuing unsecured bonds in the near term, they can still issue secured bonds.

Even billionaire investor Kirk Kerkorian, who announced on Wednesday that he was raising his stake in GM to 9 percent, said he is still committed to the automaker.

The downgrades are unlikely to affect the companies' borrowing costs in the near term, S&P analyst Scott Sprinzen said in a conference call.

Fitch Ratings and Moody's Investors Service, the other two major ratings agencies, still rate Ford and GM at investment-grade status. Neither would comment on their ratings or whether they might change Ford or GM's ratings soon.

Standard & Poor's cut GM and its General Motors Acceptance Corp. finance unit's long-term credit ratings by two notches to "BB," the second-highest junk rating. The outlook on the new rating is negative, signaling that another downgrade in the next 24 months is possible.

The agency cut Ford and Ford Motor Credit Co.'s long-term credit ratings by one notch to "BB-plus," the highest junk rating, from "BBB-minus." The outlook on the new rating is also negative.

A GM spokesman said the company was disappointed with the downgrades, but that it has ample cash and liquidity to fund its business for the foreseeable future.

Ford Chief Financial Officer Don Leclair said in a statement that the company disagreed with S&P's action. "We're disappointed that it discounts our considerable liquidity and our access to diverse funding sources, as well as the recent successes of our new products."

GM BONDS SPEED LOWER

S&P's cutting GM and Ford forces many investment-grade investors to sell their holdings to the much smaller group of portfolio managers eligible to hold junk debt.

The automakers' debt will leave the Lehman Brothers U.S. Aggregate Bond Index at the end of the month. But depending on what other ratings agencies do, the bonds may return to the index in July when the index's new inclusion rules take effect.

Between them, the two auto giants have some $453 billion of debt outstanding, which analysts estimate includes some $220 billion to $290 billion of unsecured corporate bonds that will become junk after the cuts.

General Motors Corp.'s bonds due 2033 with an 8.375 percent coupon fell 5 cents on the dollar to 74 cents on the dollar, according to MarketAxess.

Ford Motor Credit Co.'s notes due 2013 with a 7 percent coupon fell 5 cents on the dollar to 87.5 cents on the dollar.

The cost of protecting GMAC's debt against default for five years rose 170 basis points to 710 basis points, or $710,000 a year for every $10 million of principal protected.

The cost of protecting Ford Credit's debt against default for five years rose some 180 basis points to 610 basis points, or $610,000 a year for every $10 million of principal protected.

(Additional reporting by Dean Aubin in New York and Mike Ellis and Poornima Gupta in Detroit)

The worst hubris, of course, is that GM, Ford, and now IBM (in the midst of laying off 15,000 folks) all pay lip service to the importance of their employees, but force the employees to pay the penalty for the misdeeds of the top management.

It is certainly true that not one of the thousands and thousands of employees being laid off had one iota of say in how these companies decided on products and market strategy.

[Marc]

Turns out both Ford and GM's status was changed.

[AllanJ]

GM is in a possibly terminal condition. One might reasonably say that is a crisis. Whether or not its board recognises this is a time for swift, decisive and tough action probably none of us could say. But, considering how often it has been willing to throw dollars at whatever perceived panacea might improve its results (robots etc.) perhaps this time the board ought to spend whatever it takes and hire a real CEO/ President with the guts and authority to do what is necessary. I am sure Mr Carlos Ghosn like others would have his price.

[Wes Bucey]

Originally Posted by AllanJ

GM is in a possibly terminal condition. One might reasonably say that is a crisis. Whether or not its board recognises this is a time for swift, decisive and tough action probably none of us could say. But, considering how often it has been willing to throw dollars at whatever perceived panacea might improve its results (robots etc.) perhaps this time the board ought to spend whatever it takes and hire a real CEO/ President with the guts and authority to do what is necessary. I am sure Mr Carlos Ghosn like others would have his price.

So, to add to the labyrinth nature of this tale, Kerkorian is stirring up the mess with his little stick.

Kerkorian bids for stake in embattled GM
Wed May 4, 7:15 PM ET
DETROIT (Reuters) - Financier Kirk Kerkorian made a bold bet on General Motors Corp. (NYSE:GM - news) on Wednesday, offering to more than double his stake to 8.8 percent in a move that raised investor confidence in America's industrial backbone and drove U.S. stocks broadly higher.

The unexpected announcement by Kerkorian's Tracinda Corp., which could pressure GM's management into speeding up a restructuring, sent the automaker's shares soaring 18 percent from their lowest levels in more than a decade. Shares in rival Ford Motor Co. (NYSE:F - news) and U.S. auto parts companies also climbed.

Kerkorian, who shook up the former Chrysler Corp. with a hostile takeover bid about a decade ago, will spend up to $868 million and buy as many as 28 million shares of the world's largest automaker.

However, Kerkorian's lawyer said late on Wednesday that the Las Vegas casino mogul had no intention of trying to win control over GM by building up an equity stake in the company.

"This is just a passive investment and there is no intent to control the company in any way," Kerkorian's lead attorney, Terry Christensen, told Reuters in a telephone interview.

"It's for investment only, and we wanted to be very clear about that," said Christensen, who has known the reclusive Kerkorian for about 30 years.
Christensen also ruled out a possible Kerkorian bid for a GM board seat, saying recent declines in its stock price had simply made it a good time to invest in "one of the world's great companies."

"Kerkorian is saying the world is not coming to an end at General Motors -- a stroke like this gives investors and the market a lot of confidence," said Craig Hodges, fund manager at Hodges Capital Management.

Kerkorian's move follows GM's $1.1 billion first-quarter loss posted last month, its worst result since it skirted bankruptcy in 1992, and management's efforts to seek concessions from its largest union for soaring health care costs. The loss sent GM's shares into a tailspin to the lowest levels since that 1992, after adjusting for the 2000 spinoff of Delphi Corp.

GM continues to lose vital U.S. market share to foreign rivals and has been hit by spiraling costs for employee health care and raw materials to build vehicles, causing ratings agencies to warn they could downgrade the automaker's debt to junk status at any time.

The $31-a-share tender offer price from the 87-year-old Kerkorian includes the regular quarterly dividend of 50 cents per share. The price represents about a 13.4 percent premium over GM shares' closing price Tuesday on the New York Stock Exchange of $27.77, Tracinda said.

HIGH STAKES
Tracinda, the majority owner of casino and hotel operator MGM Mirage Inc. (NYSE:MGM - news), said it already owns 22 million GM shares. After the offer, Tracinda would own up to 50 million GM shares, or about 8.8 percent of the outstanding stock.

Tracinda bought the 22 million shares over the past three or four weeks, a source close to the investment firm said.

GM said in a statement that it typically does not express a view on specific investor activity, but the "board and management are committed to enhancing shareholder value."

GM shares closed up $5.03, or more than 18 percent, at $32.80 on the New York Stock Exchange on Wednesday, the biggest single-day jump in the automaker's shares in decades. Ford's shares ended up 7.29 percent at $10.16, while DaimlerChrysler shares were up about 4.2 percent at $40.95.

GM's bonds also rallied on the news. The bonds now pay a yield 6.17 percentage points higher than Treasuries, a risk premium that is 0.48 percentage point lower than on Tuesday, according to MarketAxess.
"There is no doubt in our mind that Tracinda's interest is not in the auto business, but rather in unlocking value embedded in non-core businesses," Merrill Lynch analyst John Casesa said in a research note.

Following the spike in GM shares, the stock market valued GM at about $18.1 billion, less than many smaller companies such as Gap Inc. (NYSE:GPS - news) and Avon Products Inc.

The nonautomotive assets in GM's financial services unit, such as its commercial and home mortgage units, are worth as much as $25 a share, Casesa said. GM has said that it is in talks to sell off a majority of its commercial mortgage business.

But GM's core automotive unit is worth much less, partly due to the constraints in its union contracts and the high costs of its guaranteed pension and health care plans for 1.1 million current workers and retirees.
GM assessed its book value at $49.06 per share as of the end of 2004, according to a securities filing last month. More recently, several analysts put the company's book value at $45.27 per share.

KERKORIAN UPS THE ANTE
Kerkorian was the largest investor in automaker Chrysler before its link-up with Germany's Daimler-Benz in 1998. He is currently appealing a court ruling that dismissed his $1 billion lawsuit over the handling of the deal that created DaimlerChrysler, the world's fifth-largest automaker.

Kerkorian's hand could pressure GM and the United Auto Workers union to cut jobs and close plants to make the company more competitive, said David Cole, director of the Center for Automotive Research in Ann Arbor, Michigan.
"I would be really, really concerned, particularly if I were the union," Cole said. Paul Krell, chief spokesman for the traditionally militant UAW, said it had no comment. (Additional reporting by Chicago, Boston and New York newsrooms)

My guess is that Kerkorian will NOT remain "passive" regardless of what his lip service is today (why signal a takeover and invite arbitragers to leap in and raise the price?)

The question on the table is really three part:

1. Can a show of "confidence" by investors give GM breathing room to turn around?
2. Is GM worth more broken up than whole? ("Bottom feeders" in the investment world find value in the most surprising places.)
3. Will investors force a "strategic" alliance (Daimler-Chrysler style) with another manufacturer?