NEW YORK (Reuters) -- Fitch Ratings cut Ford Motor Co.'s debt ratings on Wednesday but kept them one notch above junk status, citing a sharp decline in sales of sport-utility vehicles, falling profits and higher costs.
The rating downgrade came a day after the second-largest U.S. automaker reported a 19 percent drop in second-quarter profits, hurt by a steep loss in its North American operations.
Ford's ratings have slid from top "triple-A" levels in the 1980s as it has battled competition from Asian rivals and rising health-care costs.
Ford and its finance arm are among the biggest borrowers in the United States, with about $158 billion of total debt.
Ford's ratings were cut to junk status by Standard & Poor's in May, and Moody's Investors Service is expected to follow soon, cutting at least the parent company's ratings to junk.
"I still see them going down to high-yield, and I think it could be sooner rather than later," said Tim Compan, portfolio manager for Allegiant Asset Management Co. in Cleveland. "It's hard to point to anything positive out of this last quarter's numbers."
Squeezed by fierce competition in the U.S. vehicle market, Ford on Tuesday warned it expected its global automotive business to post a loss this year. Following the lead of its rival General Motors, Ford has recently launched a hefty discount program to win back market share.
Fitch cut the long-term senior unsecured ratings on Ford and its finance arm by one notch to "BBB-minus," the lowest investment-grade rating, from "BBB." The outlook on the new rating is negative, signaling that another downgrade is likely over the next one to two years.
Still, Fitch said that ratings of Ford and its finance arm, Ford Motor Credit Co., are likely to remain investment-grade the rest of this year because performance of new products and healthy liquidity will give it time to address cost issues.
Yields on Ford's bonds fell relative to Treasuries on relief that Fitch did not cut the automaker to junk.
Yield spreads on Ford Motor Credit Co.'s notes with a 7.375 percent coupon due in 2009 narrowed by about 0.30 percentage point to 3.38 percentage points more than Treasuries, according to MarketAxess.
Ford's shares fell 15 cents, or about 1.4 percent, to $10.69 on the New York stock exchange.
Moody's Investors Service said in June it was reviewing Ford and its finance arm for downgrades. Moody's now rates Ford one notch above junk status and its finance arm one notch higher.
Two junk ratings would mean that Ford would be ejected from Lehman Brothers' widely followed high-grade indexes, prompting selling by some investment-grade funds. However, Ford's finance arm, which holds most of the company's debt, is expected to remain investment grade for the near future.