NEW YORK --Standard & Poor's and Fitch on Wednesday both moved closer to cutting General Motors' debt ratings to junk status after the world's biggest automaker slashed its 2005 earnings forecast.
A cut below investment grade by even one ratings agency could boost GM's borrowing costs and wreak havoc in the corporate bond market. Many investment funds are ineligible to hold junk bonds, and they would have to sell billions of dollars of GM debt.
"A downgrade would be very disruptive to the market and GM, but I think they can manage through it, as long as they can get their house in order," said Kent White, corporate bond analyst at Thrivent Financial in Minneapolis. Thrivent manages some $19 billion of public high-grade and high yield bonds.
To right the ship, GM needs to launch successful products and address health care costs, White added.
The potential for rating downgrades left investors concerned about overall corporate credit quality, which helped weaken corporate bonds, pull stocks lower and lift prices on safe Treasuries.
Setting the stage for a downgrade to junk status, S&P revised its rating outlook on GM and General Motors Acceptance Corp. to negative from stable, signaling that a downgrade is more likely over the long term. The agency has GM's debt ratings to a step above junk status.
S&P said it views GM's rating as "tenuous" and could be cut at any time if it looked like the automaker was not on a path to improve financial performance in 2006 and beyond.
In a separate move, Fitch cut GM and GMAC's debt ratings one notch to a step above junk status, and left their outlooks at negative.
Rival Ford Motor Co., facing some of the same pressures as GM, said on Wednesday it expects profit for 2005 to be at the lower end of its previous forecast. Both automakers are struggling with high inventories, protracted market share losses and soaring health care costs.
GM READY FOR SLOW YEAR
The rating action came after GM warned that its 2005 earnings will be as much as 80 percent below its prior forecast because of lower sales in its key North American market and a tougher pricing environment. GM said it expects to post a first-quarter loss, compared with a prior forecast of breaking even or posting a profit.
Given the company's difficulties, GM bonds are already trading like credits at the weaker edge of the junk spectrum. GM has roughly $100 billion of unsecured corporate bonds outstanding. About half is eligible for major U.S. bond indexes.
If both Fitch and S&P cut GM's ratings to junk, the company's bonds will fall out of major investment-grade indexes, forcing even more investors to sell their GM debt.
GM's outstanding U.S. debt is about 2 percent of the investment-grade market, and would be about 7 percent of the U.S. junk bond market. Total debt at GM as of year end was around $300 billion.
GM is the third-largest corporate borrower in the United States behind General Electric Co. and Ford, with more debt than the gross domestic product of many countries.
Spreads, or the extra yield investors demand for taking a company's credit risk, on GM's 8.375 percent bonds due 2033 widened 0.6 percentage point to 4.65 percentage points more than Treasuries, according to MarketAxess.
GM's debt was rated "AAA" in 1981 by S&P, but has slid closer to junk status as the company has lost market share to foreign competitors.
Another rating agency, Moody's Investors Service, also said it may cut its ratings on GM and GMAC. Moody's rates GM's long-term debt "Baa2," two notches above junk, and GMAC's one notch higher at "Baa1."
S&P and Fitch both rate GM and GMAC's long-term debt at "BBB-minus."