S&P Drops the Junk On GM and Ford
Yesterday Standard & Poor’s lowered General Motors’ and Ford’s credit ratings to “junk” status.
Gas prices have taken their toll on the sales of both companies. GM’s domestic sales fell 5% from January to April, while Ford’s dropped 4.2%.
With junk ratings, the automakers have fewer avenues for raising funds because many large institutional investors cannot buy speculative-grade debt.
Ratings below investment-grade imply a much higher chance of a company defaulting on its debt. But both companies have ample cash on their balance sheets, and said they were disappointed with the action.
“This is the beginning of the end of the U.S. auto industry as most people have come to know it,” says Egan-Jones Ratings managing director, Sean Egan. “In another two years, we’re likely to see substantial layoffs and bankruptcy filings by possibly one or both of these companies and massive restructurings of most of the U.S. auto manufacturers.”
GM obviously wasn’t pleased with S&P’s rating downgrade, but the company said that GMAC, has sufficient funds for its operations “for the foreseeable future.”
GM and Ford both issued statements saying that they disagreed with S&P’s ratings. Both companies claim to have adequate cash and liquidity to sustain operations.
“Clearly, GM has many challenges in North America, but the company is moving aggressively to address these challenges,” said GM.
These new “junk” ratings may cause GM and Ford to have to face higher interest rates to get enough buyers for their bonds.