NEW YORK -- Investors sold General Motors bonds on Wednesday as worries mounted that its rating outlook could be changed to negative, setting the stage for a downgrade to junk.
GM on Tuesday posted a 13 percent decline in February vehicle sales as Asian rivals continued to eat its market share.
"If they didn't already, Standard & Poor's must be getting itchy fingers at this news, and a change in the rating outlook at least to negative must be very, very close," said Suki Mann, a credit strategist at SG of Paris, in a note to clients.
S&P in January affirmed GM's debt rating at BBB-minus, one step above junk, but said it was considering changing the company's stable outlook, with a decision likely by midyear. S&P said it was not ruling out more immediate action.
A change in the outlook would signal that a cut to junk is more likely within the next two years. Downgrades to junk can raise borrowing costs dramatically.
"As we had indicated back in January, we continue to reassess the appropriateness of the stable outlook," S&P analyst Scott Sprinzen said Wednesday.
BANKING ON NEW LAUNCHES
GM, which started the year with swollen inventories of unsold cars and trucks, was forced to cut production, a move almost certain to hurt 2005 financial results.
GM is introducing 17 products this year and expects launches to help sales.
GM had about $291 billion of debt as of Sept. 30, topping that of many nations, as well as their annual economic output.
GM is the third-largest issuer of corporate bonds, behind General Electric Co. and Ford Motor Co.
Spreads on GM's benchmark long bonds hit their widest levels in six weeks on Wednesday as investors demanded a higher premium for the risk.
GM's 8.375 percent bonds due 2033 now yield 3.85 percentage points more than Treasuries, 0.03 percentage point wider on the day, according to MarketAxess. They had traded as wide as 3.92 percentage points over Treasuries earlier Wednesday.
"We're not especially surprised by the results, but we're concerned that S&P may move sooner," said Mirko Mikelic, portfolio manager and analyst for Fifth Third Investment Advisors.
BONDS AT JUNKLIKE SPREADS
GM was hurt in February by declining sales of its SUVs as high gasoline prices curbed demand, as well as by disappointing car sales.
"Market share is being lost at a steady pace, and the bread and butter of their business is basically SUVs," said Mikelic. With Asian rivals encroaching on the SUV market, "that could spell a lot of trouble for GM," he said.
GM spokesman Jerry Dubrowski said it would not be appropriate to comment on actions that the ratings agencies may take.
"GM has sufficient cash and cash flow to sustain the company over the foreseeable future," he said, adding that GM and its General Motors Acceptance Corp. finance arm each had about $23 billion of cash at the end of 2004.
S&P may wait until GM's first-quarter earnings are out in mid-April to take action on the rating outlook, said Tim Nelson, analyst at US Bancorp Asset Management.
"I don't have a good sense for how much leeway S&P had built into their current outlook," said Nelson. "Obviously, with what happened with yesterday's sales numbers, you've got to question whether they've built in that much weakness."
GM's bonds are already trading at junklike spreads, meaning the bonds may not weaken much more if a downgrade occurs, said Vince Boberski, head of fixed-income research and strategy at RBC Dain Rauscher.
"The bonds certainly have a worst-case scenario built into spreads," said Boberski. "Everybody's kind of waiting for the other shoe to drop, and I'm not sure it matters that much when it does."