NEW YORK -- General Motors will be hurt but not crushed by a downgrade to junk status because it has a variety of ways to raise capital, analysts said on Thursday.
"GM has a lot of options," said Bob Auwaerter, head of fixed-income portfolio management at Vanguard Group in Valley Forge, Pa., which manages over $260 billion of bonds.
Although a cut to junk status for GM is not a foregone conclusion, on Wednesday rating agencies Standard & Poor's and Fitch moved closer to cutting GM to below investment grade after the world's largest automaker slashed its 2005 profit outlook.
For companies with massive amounts of debt outstanding, cuts below investment-grade can be catastrophic. In 2001, Enron Corp.'s bankruptcy was hastened when three major ratings agencies cut the company's credit to junk in one day.
But GM is no Enron, and although the company has a lot of work to do, it should be able to weather any loss of investment grade status, analysts said.
For one thing, GM has some $57.7 billion of cash and marketable securities on its balance sheet, including its finance arm General Motors Acceptance Corp.
The parent company has little debt maturing until at least 2010, and while GMAC does have substantial debt coming due in coming years, it also has access to the secured debt market and the whole loan market.
Over the last four years, GMAC has increased its secured borrowings to the point where about two-thirds of its $270 billion of debt is asset-backed, up from one-third of its borrowings in 2001.
GM can also borrow in the whole loan market, where it sells car and home loans to investment banks that in turn issue bonds backed by the assets.
"Even if they couldn't borrow in the corporate bond market at all, and had to rely solely on alternative funding, we think they could do that," said Craig Hutson, an analyst at credit research company Gimme Credit in Chicago.
GM is wrestling with significant problems now. It has high inventories, it is losing market share in the key North American market, and its pension and health care costs are sky high. These factors led the company to warn on Wednesday that 2005 earnings would be as much as 80 percent below its prior forecast.
Risk premiums on the company's 8.375 percent bonds due 2033 have jumped 0.64 percentage point to 4.69 percentage points, closing on Thursday at their widest level since the bonds were issued in 2003.
A downgrade to junk status is not a foregone conclusion for GM, but the company moved closer to losing its investment-grade status on Wednesday.
Standard & Poor's, which rates GM at a step above junk revised the outlook on GM's debt to negative from stable, and said the automaker's hold on its investment-grade rating is "tenuous."
A cut could come at any time if the rating agency is not convinced the company's outlook for 2006 and beyond is not improving, S&P said.
Fitch, meanwhile, cut GM's debt ratings to a step above junk, and left the outlook at "negative."