GM and Ford face financing issues

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http://news.ft.com/cms/s/d9c03b1e-29...00e2511c8.html

GM and Ford face 'junk' status
By Ivar Simensen in London
Published: October 28 2004 20:01 | Last updated: October 28 2004 20:01

General Motors and Ford, two of the world's biggest issuers of corporate debt, face a period of uncertainty which in the worst instance could result in their bonds being downgraded to speculative, or "junk" status unless corporate performance improves.

This would increase their borrowing costs radically and could also have dramatic consequences for the bond market.

Last month ratings agency Standard & Poor's downgraded General Motors to the lowest grade above junk status, Triple B minus. However the bonds rallied because the market had feared S&P would put the company on negative outlook as well.

GM's rating from the other agencies is only a little better. Moody's Investors Service rates it two levels higher at Baa1 but has placed the credit on review for a possible downgrade. Fitch Ratings is one lower at Triple B, also with a negative outlook. The ratings of Ford are also hovering just above junk.

"The deterioration in the automotive earnings of both manufacturers, together with the uncertain outlook for economic growth next year does not bode well for their credit quality," said Vivek Tawadey, credit strategist at BNP Paribas.

The companies could be placed on creditwatch as early as next year in preparation for a downgrade, Mr Tawadey said.

A downgrade to junk grade would have significant implications for the bonds and for the whole bond market. Fiat, the Italian auto group, saw yield spreads more than double in the three months after it was placed on creditwatch negative two years ago. Six weeks after being placed on creditwatch, Fiat was downgraded to junk.

The market has learned to cope with so-called fallen angels, companies that lose their investment-grade rating, but it has never experienced it in an issuer of the size of Ford or General Motors.

The two carmakers between them have more than $200bn of bonds outstanding. Only General Electric is bigger and Ford and GM represent a core holding for large investors, many of which are restricted from holding speculative-grade rated bonds.

Their size is also reflected in the market indices, which is why a downgrade would change the bond market landscape.

Without Ford and GM, the percentage would drop to 11 per cent and the other sectors would increase proportionately.

These changes should in theory boost bonds in the telecommunications, utility and other sectors, as fund managers track and measure their performance against the indices.