NEW YORK -- In a one-two punch for financial markets, Standard & Poor's cut General Motors' and Ford Motor Co.'s debt ratings to junk status on Thursday, citing brutal global competition and flagging sales of the automakers' most profitable vehicles.
The downgrades, which total about $290 billion and are the largest cuts to junk in a single day, jolted financial markets. Stocks and the dollar weakened. Safe-haven Treasury debt prices rose. The broad junk bond market, which by some measures will expand about 15 percent in short order, dropped.
Burdened by junk ratings, the automakers have fewer avenues for raising funds. Their shares extended their losses and their bonds fell by about 5 cents on the dollar as investors braced for investment grade portfolio managers to sell auto debt.
The companies are facing difficult times and cuts to junk were expected later this year, but investors were surprised that S&P took action so soon.
GM and Ford are struggling with high health-care, pension and materials costs, which, combined with brutal competition from overseas companies have winnowed their market share.
The companies have ample cash for at least the next several years. The two other major ratings agencies still rate Ford and GM at investment-grade status, but further cuts for the companies are possible, analysts said.
"Potentially we've seen one or two shoes drop now, but it might be a four- or five-legged thing with more shoes to drop," said Jon Brorson, managing director of growth equities at Neuberger Berman in Chicago.
Investors had become more hopeful for dramatic changes at GM on Wednesday after billionaire Kirk Kerkorian, known for being an activist investor, said he was more than doubling his stake in the company to about 9 percent.
GM and Ford reported lower April U.S. vehicle sales on Tuesday, even as Toyota Motor Corp.'s U.S. sales rose 25.9 percent from last year for its best month ever.
Crucially, GM and Ford's SUV and pickup sales fell. These vehicles have provided most of their auto-related profits since the late 1990s, but are less attractive as gasoline prices rise.
Standard & Poor's cut GM and General Motors Acceptance Corp.'s long-term credit ratings by two notches to "BB," the second-highest junk rating. The outlook on the new rating is negative, signaling that another downgrade in the next 24 months is possible.
The agency also cut Ford and Ford Motor Credit Co.'s long-term credit ratings by one notch to "BB-plus," the highest junk rating, from "BBB-minus." The outlook on the new rating is also negative.
A GM spokesman said in a statement that the company was disappointed with the downgrades, but that it has ample cash and liquidity to fund its business for the foreseeable future.
Ford CFO Don Leclair said in a statement the company disagreed with S&P's action. "We're disappointed that it discounts our considerable liquidity and our access to diverse funding sources, as well as the recent successes of our new products."
GM BONDS SPEED LOWER
S&P's downgrades of GM and Ford may force many investment-grade investors to sell holdings to the much smaller group of portfolio managers eligible to hold junk debt.
Junk, or speculative grade status, signals that a company is more likely to default on its debt.
Between them, the two auto giants have some $453 billion of debt outstanding, including some $290 billion of unsecured corporate bonds that will become junk after the cuts.
GM's bonds due 2033 with an 8.75 percent coupon fell to about 74 cents on the dollar from about 79 cents before the news, traders said. Yields on other GM debt relative to Treasuries rose by about 50 to 60 basis points. A basis point is 0.01 percentage point.
The rising gap between GM and Treasury yields is a sign investors see more risk in holding the automaker's debt.
Yield spreads on Ford Motor Credit's 7 percent notes due 2013 widened by about 60 basis points to 460 basis more than Treasuries, a trader said. Ford Credit is Ford's finance arm.