NEW YORK -- Merrill Lynch & Co. expects General Motors' debt ratings will be cut to junk status "in the very near term" by Moody's Investors Service, the firm said in a research report.
GM's lack of substantial liquidity and heavy pension cost burdens are the main drivers behind the likely ratings downgrade, according to Merrill Lynch.
Merrill said it is also skeptical of GM's 2006 product line due to its emphasis on larger SUVs and pickup trucks, which the industry seems to be shifting away from, and because the automaker has not released any design photos of its new products.
Financial markets are closely watching debt ratings for GM and Ford. Last week, Standard & Poor's cut the automakers' debt to junk status with negative outlooks.
Since that announcement by S&P, investors have been bracing for the next ratings action, watching and waiting to see what moves Moody's and Fitch might make on the automakers.
Moody's currently rates GM's debt "Baa3," one notch above junk.
On Thursday, Moody's cut Ford Motor Co's debt ratings to "Baa3" from "Baa1."
Merrill Lynch said Ford is a stronger credit than GM and both should not have the same credit rating.
"We believe Fitch and Moody's will continue to keep Ford in investment grade territory for some time to come," Brian Zinser, a Merrill Lynch analyst, said in the research report dated Thursday.
"GM, however, we expect will be high yield across-the-board in the near term," he said.
Merrill Lynch said it also expects Fitch to downgrade Ford, but expects it would be one notch to "BBB," the second lowest investment grade level.
Both automakers have faced steep competition from foreign manufacturers, yet Merrill Lynch said Ford has lost 1.1 share points this year to date compared with GM's loss of 1.6 share points.
Merrill Lynch also said Ford has a more a liquid balance sheet than GM and has made strides toward reaching restructuring goals made in 2002.
GM and Ford are saddled with rising costs for health-care and pensions for current employees and retirees. However, Ford is a smaller and only has to absorb costs for 1.2 retirees for every active employee, while GM's ratio is 2.4 to one, Zinser said.
Spreads on GM's 8.375 percent bonds sure 2033 widen by 0.07 percentage point to 7.46 percentage points over U.S. Treasuries on Friday, according to MarketAxess. Spreads on Ford's 7.450 percent bonds due 2031 widened by 0.25 percentage point to 5.73 percentage points over Treasuries.