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News and Commentary: Auto News, Analysis and EditorialS&P
and Moody's Play Catch-up as U.S. Consumers Sprint Toward Quality and Out of GM
Products: Investigations into General Motors' Long-Term Creditworthiness
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S&P and Moody's Play Catch-up as U.S. Consumers Sprint Toward Quality and Out of GM Products: Investigations into General Motors' Long-Term Creditworthiness
Moody's Investor Services, one of the world's important bond rating agencies, announced that it now views the outlook of its current rating of General Motors Corporation's long-term bonds to be negative. This means that it may lower its rating of GM's long-term bonds from currently two notches above junk to one notch above junk.
Last fall, Standard & Poor's, also one of the world' important bond rating agencies, lowered its rating of GM's long-term bonds to one notch above junk, but gave this rating a stable outlook. This year it repeated its stable outlook, but announced an investigation into GM's long-term creditworthiness, "focusing on the appropriateness of the stable rating outlook."1 This means that later this year, S&P may lower GM's bond rating outlook to negative, often, if not usually, a precursor to a bond downgrade. If an S&P downgrade occurs, it will be to junk.
To declare its negative outlook on GM's current bond status, Moody's used the occasion of GM's announcement that it will pay Fiat SpA $2 billion to settle a contractual provision that the Italian automaker had asserted against it. As explanation, Moody's statement cited the $2 billion payout and observed, "This outflow comes as the company is facing increasing challenges in its competitive and operating environment."2
GM's entering into the 2000 contractual relationship with Fiat, even then an automaker with financial troubles, has been termed "a strategic blunder,"3 "a big mistake,"3 "foolhardy,"4 and "an expensive mistake;"5 nonetheless, the $2 billion to be paid by GM to free itself from the deal is insignificant relative to the total cash that GM has amassed by issuing bonds. S&P analyst Scott Sprinzen is quoted as saying, "We view it as basically a neutral development for GM's rating. GM has the cash on hand to accommodate the cash payment."6
However, one fact that concerns both Moody's and S&P is the increased difficulty that GM has encountered in moving its vehicles off dealer lots. This occurs at a time when the quality products of Toyota Motor Corporation and Nissan Motor Company are rather flying off their dealers' lots. See "In the U.S. in January 2005, Toyota and Nissan Sales Advance, Consumers Continue to Reward Toyota and Nissan Quality with Greater U. S. Auto Market Share and Again Take GM and Ford to the Shed," February 2005, AOI.
General Motors has the lowest 1996-2000 Reliability Percentrank average of the Big Three - .29 versus .50 for Ford Motor Company and .33 for the Chrysler division of DaimlerChrysler, AG. (See Table I-MVRP.) Also, it has dominated AOI's Worst Cars and Trucks tables since 1994 and U.S. safety recalls for at least the past two years (See "General Motors' U.S. 2003 Recall Numbers: A Bottomless Pit and a GM Defense?" March 2004, AOI, "General Motors' Recalls Remain Gargantuan in First Half of 2004," July 2004, AOI, and "Carmakers Staggered by Record'04 Recalls," January 4, 2005, The Detroit News, at http://www.detnews.com/2005/autosinsider/0501/04/A01-48858.htm).
The U.S. consumer sprint toward quality and out of GM products has prompted GM to announce plant closures and slowdowns and model extinctions. It has also prompted some speculation as to whether GM might file a Chapter 11 bankruptcy reorganization petition in the not too distant future, but some years hence.7
Such a bankruptcy proceeding may permit GM to shed some of its legacy costs of production, but it also could result in the conversion of GM's bonds into common stock or preferred stock, which could be well nigh worthless at the time of such a proceeding.
This prospect concerns bondholders, but it also concerns bond rating agencies as well. For bond rating agencies will not want to permit the consumer sprint toward quality to so outpace their rating changes that they end up as defendants in numerous lawsuits, or a massive class action lawsuit, by GM bondholders.
1 "Analysts Gauge GM-Fiat Costs to Companies, Their investors," Detroit Free Press, February 15, 2005, at http://www.freep.com/money/autonews/gm15e_20050215.htm
2 "GM Pays Fiat EU1.5bn over Option Dispute," Financial Times, February 14, 2005, available at Yahoo! News
3 "GM Warned of Possible Downgrade," Reuters, February 14, 2005, available at Yahoo! News
4 "GM Will Pay $2 Billion to Dump Fiat," The Detroit News, February 14, 2005, at http://www.detnews.com/2005/autosinsider/0502/14/A01-89042.htm
5 "GM to Pay $2 Billion to End Ties with Fiat," Detroit Free Press, February 14, 2005, at http://www.freep.com/money/autonews/gm14e_20050214.htm
6 "GM Gets Warning on Credit," The Detroit News, February 15, 2005, at http://www.detnews.com/2005/autosinsider/0502/15/C01-90430.htm
7 "GM Boss Debunks Bankruptcy Doomsday Scenario," The Detroit News, January 11, 2005, at http://www.detnews.com/2005/insiders/0502/15/A01-56205.htm
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