NEW YORK -- Fitch Ratings on Tuesday cut General Motors' debt ratings to "junk," becoming the second agency to rate the world's largest automaker below investment grade as high gasoline prices erode its SUV sales.
The downgrade follows a similar move by Standard & Poor's on May 5 and will cement GM's status as a junk credit, raising borrowing costs and limiting its options for raising funds.
"The long term will be tough for GM," said Kent White, auto credit analyst at Thrivent Financial in Minneapolis, which owns GM bonds. "The only option they have ahead of them is for a pretty significant restructuring of their North American auto operations."
Sales of mid-sized and large SUVs, a key source of GM's profits, have dropped more than 20 percent this year, Fitch said in a statement. Weak SUV sales, mounting competition in the truck market and rising costs could cause GM to deplete $6 billion in cash this year, the rating agency said.
The downgrades by Fitch and S&P mean that GM will fall out of major U.S. bond indexes, forcing investment funds ineligible to hold junk bonds to sell billions of dollars of GM debt. Some investors said the downgrade was not a surprise, however, so the worst selling may be over.
"Most people were expecting Fitch to cut GM to junk this year, so they did us all a favor and did it sooner rather than later," said Brian Jacoby, auto credit analyst at Morgan Stanley in New York.
GM and its finance arm had about $292 billion of long-term debt including secured notes as of March 31. The automaker is the largest U.S. debt issuer ever cut to junk, topping WorldCom, which had $32 billion of debt slashed to junk in 2002.
The Fitch downgrade dashed hopes that GM's bonds might stay in the widely followed Lehman Brothers credit index. Under new rules that go into effect in July, bonds qualify for the index if two out of three agencies rate them investment grade. GM is still rated the lowest investment grade by Moody's Investors Service.
GM spokeswoman Toni Simonetti said the automaker was disappointed by the downgrades and that its finance arm is feeling the pain of the rating actions. She was referring to a run-up in borrowing costs at GM and General Motors Acceptance Corp. since the S&P downgrade.
As it battled global competition and rising health-care costs, GM has watched its ratings slide from top "triple-A" levels in the 1980s.
The automaker's liquidity remains healthy, with about $38 billion of cash at GM and its finance arm, Fitch said.
Still, GM is facing high hurdles, the rating agency said. It needs cash for critical new products, steel costs will likely remain high through next year, and labor strife could ensue as GM tries to trim health-care costs for employees.
The rating agency will watch GM's progress over the next two or three quarters, including its sales, production figures and competition, in deciding whether to cut its ratings again, Fitch officials said on a conference call.
"They basically just need to sell cars that people want at the right price and lower expenses," said Lori Andrews, a credit analyst at Federated Investors in Pittsburgh. "That sounds quite simple, but for a gorilla as big as GM with so many fixed and legacy costs ingrained in operations, it's not as easy as it sounds."
GM's bond prices fell after the downgrade. Bonds with an 8.375 percent coupon due in 2033 fell to 72.75 cents on the dollar from 73.5 cents before the Fitch action, according to MarketAxess.
GM's shares fell 82 cents, or 2.5 percent, to $31.77 on the New York Stock Exchange. The Dow Jones industrial average was little changed from before the downgrade.
Treasury debt prices rose slightly while the dollar showed no reaction to the news.
"I am surprised financial markets did not react more," said Brian Reynolds, chief market strategist for M.S. Howells & Co. "It has the potential to be a negative across the board because of the sheer size of the debt involved."
Fitch cut the long-term senior unsecured ratings on GM and GMAC by one notch to "BB-plus," the highest junk rating, from "BBB-minus." It also their short-term ratings to "B" from "F3."