Moody's cuts GM, Ford to junk
Ratings service cites competition and cost factors in its downgrades.
August 25, 2005: 7:17 AM EDT

NEW YORK (Reuters) - Moody's Investors Service on Wednesday cut General Motors Corp.'s and Ford Motor Co.'s debt ratings to junk status.

In the GM (Research) cut, the ratings service cited continued operating losses in North America and restructuring challenges at the world's largest auto maker.

Moody's also cut the ratings of General Motors Acceptance Corp., GM's finance arm, to junk status.

The outlook for both companies is negative, Moody's said, which means further downgrades may result if GM fails to successfully implement its North American recovery plan, including cutting health-care costs and reducing the number of workers.

"We are working very hard in discussions with the UAW regarding healthcare," said GM spokesman Jerry Dubrowski, in response to the downgrade. "We are well aware of our challenges with healthcare and our cost footprint."

Moody's forecast that GM's total automotive operating cash flow in 2005 will be about negative $3 billion, but that the company's $20 billion cash and other reserves will provide it with adequate liquidity over the next 12 months.

The downgrades affect about $170 billion of outstanding debt, Moody's said.

Moody's was the last of the three major ratings agencies to cut the auto giant to junk status.

Moody's cut GM's senior unsecured debt rating to "Ba2" from "Baa3," and GMAC's senior unsecured rating to "Ba1" from "Baa2." The outlook is negative on the new ratings.

Dubrowski said GM was disappointed with the downgrade, but pleased that Moody's continues to view GM and GMAC as separate credits, unlike Standard and Poor's and Fitch Ratings.

Moody's also cut GM's short-term rating to "Not Prime" from "Prime-3."

Ford cut too
Moody's cut in Ford Motor Co.'s debt ratings to junk status was the second cut to junk for the automaker as it battles global competition and rising costs.

Moody's also cut its ratings on Ford's finance arm but left them at investment-grade status. Most of Ford's debt is held at its finance arm, Ford Motor Credit Co.

Ford (Research) and its finance arm are among the biggest debt issuers in the United States, with about $158 billion of debt as of June 30.

Strong competition, soaring health care and raw material costs and a slide in U.S. market share have forced the second-largest U.S. automaker to slash its profit forecast twice this year.

Ford's financial performance is expected to remain weak because it will take time to improve the company's uncompetitive cost structure in North America, Moody's said in a statement.

"Although the decision Moody's made today is disappointing, it doesn't shake our determination to achieve continued success as a global automaker," Don Leclair, Ford's chief financial officer, said in a statement.

Moody's cut Ford's long-term credit ratings by one notch to "Ba1," the highest junk rating, from "Baa3." It cut the long-term ratings on Ford Motor Credit by one notch to "Baa3," the lowest investment-grade rating, from "Baa2." The rating outlook for both companies is negative, meaning another rating cut is likely over the next 12 to 18 months.

In May, rating agency Standard & Poor's cut Ford and Ford Credit to junk status, citing declining sales of sports utility vehicles and trucks.

Ford Motor Credit's bonds with a 7 percent coupon due in 2013 fell to 96.4 cents on the dollar, down from 97.5 cents on Tuesday, according to MarketAxess.

source: http://money.cnn.com/2005/08/25/news...reut/index.htm