NEW YORK -- Credit rating agencies are worried about Ford Motor Co. and to a lesser extent General Motors as a weak production outlook, underfunded pension funds and overseas competition fuel the prospect for downgrades.
"I would say there's a lot to be concerned about," Standard & Poor's analyst Scott Sprinzen said.
S&P has a "BBB" rating, near the bottom of the investment grade scale, on both Ford's and GM's long-term debt, with a negative outlook on Ford. That means it is in danger of a drop to just above junk status. S&P has a stable outlook on GM.
Investors spooked about possible downgrades have sent spreads -- the yield gap between corporate bonds and Treasuries -- far wider on bonds issued by the finance units of GM and Ford following news on Monday that U.S. sales of new cars and trucks slumped in February. A widening spread generally indicates the market sees more risk.
"Ford and GM, on an operating basis, have breached the norms and are impaired enough that their credit profile looks more like the credit profile of an average to weak BBB," FTN Financial industrial credit analyst Mike Dahood said.
"You could argue the financial services pieces have helped these companies remain in the investment grade categories," Dahood said. He noted that he expects both companies to be downgraded this year, but to remain at investment grade.
If autos were to drop to junk status -- because they comprise the largest percentage of many U.S. credit indexes -- it could rattle debt markets, with forced selling into a pool of potentially unwilling buyers.
PLENTY OF CONCERNS
Factors weighing on possible downgrades, which typically lead to higher borrowing costs, include upcoming labor talks with the United Auto Workers on a new contract and a continued push by foreign manufacturers to increase production of sport-utility vehicles and small trucks, whose high profit margins have bolstered GM and Ford in recent years.
"I think there's danger for the autos in the long term," said Sasha Kamper, a portfolio manager for Principal Global Investors, which holds more than $40 billion of debt securities.
Ford's $161 billion of debt is more than 10 times its market capitalization of about $14 billion.
"There's a lot of concern that Ford has a great deal of debt on its balance sheet," she added. "GM is in a better position than Ford in the short-run because they have a lower variable cost structure and very good management."
Still, GM said on Wednesday it was considering the sale of most or all of its commercial mortgage business because it has been difficult to raise capital through some debt markets following a rating downgrade last October.
For that reason and others, independent ratings agency Egan-Jones Ratings Co. is far more bearish than its rivals on the sector, with Ford already at junk status.
"If its name were not Ford they'd probably be in bankruptcy now," founder and managing director Sean Egan said. "They continue to have access to the market because of the good brand name they've built up over the past 100 years, and if it weren't for that brand name Ford would have an increasingly difficult time rolling over its liabilities."
Egan-Jones has a "BB minus" rating on Ford, with a projected "B plus" rating, and "BB plus" on GM, with a projected "BB."
Ford's $22.6 billion stockpile of cash and marketable securities last quarter has appeased some investors.
Most investors and analysts have stopped short of joining Egan's bleak outlook and aligned themselves more with the likes of Moody's, which has a negative outlook on U.S. auto makers but maintains an investment grade rating.
Moody's has Ford's long-term debt rated "Baa1" and GM rated "A3," one notch above Ford.
Fitch also has a negative outlook on both Ford and GM, which means Ford is in danger of a downgrade from its "BBB-plus" and GM the same for the "A-minus" rating on its senior unsecured debt.
Fitch analyst Mark Oline cautioned against reading too much from the February sales figures, but said it could be a long-term negative harbinger.
"In this case there's some concern that demand has been so high for so long due to a lot of factors that there could be a strong amount of sales decline," he said.
"I think our rating would indicate that Ford certainly has sufficient liquidity and other strengths, including its cash portfolio, to weather cyclical fluctuations," Oline added. "Without question, though, the company faces some serious issues."