'Junk Bond' Status Hurts Ford, GM's Borrowing Power

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The credit ratings for General Motors and Ford were lowered yesterday to junk status by Standard & Poor's, one of the major credit rating agencies. That means Ford and GM will be shut out of some credit markets, and it will cost them more to borrow from others. Both companies responded by saying they have plenty of cash on hand to avoid a crisis. NPR's Jack Speer reports the downgrade raises questions about the financial condition of America's two largest automakers.

JACK SPEER reporting:

The move to cut Ford and GM's debt ratings to non-investment grade, or junk bond, status wasn't a total shock. Both companies have been steadily losing market share. Profits at Ford have been sinking and have disappeared completely at GM. Scott Sprinzen is a credit analyst with S&P. He says neither company has a good strategy to deal with mounting problems.

Mr. SCOTT SPRINZEN (Credit Analyst, S&P): We've been studying these companies closely, talking to the managements, going through our own deliberations. Partly it was the first-quarter earnings, the April sales numbers and a lot of other things, too.

SPEER: Both GM and Ford reported lower sales in April, but because the financial picture at GM is considered to be worse, its debt rating was lowered a bit more. David Healy is an auto industry analyst with Burnham Securities. He says what seems to have alarmed the S&P analysts the most was the erosion of a key sales area that until recently had been very profitable.

Mr. DAVID HEALY (Burnham Securities): S&P pointed to the very rapid deterioration in GM sales of their only profitable products in North America, the full-size SUVs like the Chevy Tahoe.

SPEER: The ratings agency expressed similar concerns about Ford and said industrywide, it appears sales of SUVs have now stalled. High gas prices have many Americans rethinking their love affair with SUVs. The vehicles have been major profit centers at GM and Ford for years, and both companies have been counting on that to last. Healy says that's now looking like a bad bet.

Mr. HEALY: Americans, at least until gas prices got to two and a half bucks, didn't want small cars, didn't want small SUVs, didn't want medium-sized cars, and I think GM, in 20/20 hindsight, made a mistake by giving Americans what they wanted.

SPEER: Another area S&P cited as being potentially problematic for both Ford and General Motors was high health-care costs. GM has said it expects to spend more than $6 billion this year on health care for its current and former workers and their families. Both automakers called the ratings downgrade disappointing and were quick to reassure Wall Street the move won't cause a crisis. Jerry Dubrowski, GM's director of financial communications, said GM and its finance unit, GMAC, between them had $38 billion in cash on hand at the end of the first quarter.

Mr. JERRY DUBROWSKI (GM's Director of Financial Communications): It does increase the cost of borrowing, both for GM and GMAC. Having said that, the good news is that both GM and GMAC have adequate cash and liquidity to run their business for their foreseeable future.

SPEER: The ratings downgrade by S&P came just one day after billionaire investor Kirk Kerkorian announced his intentions to seek a 9 percent stake in GM. S&P was the only rating agency to issue a downgrade and would not rule out future downgrades in the future. Paul Eisenstein is with thecarconnection.com.

Mr. PAUL EISENSTEIN (Thecarconnection.com): Well, this is a long-term issue. The bond rating agency just really had to downgrade debt, though it's short term, because of long-term problems.

SPEER: Ford said while the latest development presents, quote, "a challenge," the company is committed to continued cost-cutting and achieving success as a global automaker. GM and Ford both saw their shares fall about 5 percent after yesterday's announcement. Jack Speer, NPR News, Washington. Transcript provided by NPR, Copyright NPR.