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U.S. Consumer Shift to Quality Prompts S&P to Cut GM Debt Deeper into Junk
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Visitor support makes this site possible. Please shop often via Auto on Info. Thank you. Men's Fine Tie Clips and Ties Forzieri tie clips Men's Ties by Versace Men's Ties by Valentino To view more men's ties, icons, and search phrases, click here. Men's Watches Men's Watches by Gucci Men's Watches by Movado Men's Watches by Cartier Men's Watches by Omega To view more men's watches, icons, and search phrases, click here. Fine Women's Watches Women's Watches by Cartier Women's Watches by Movado Women's Watches by Gucci To view more fine women's watches, icons, and search phrases, click here. Auto on Info December 2005
Relentless U.S. Consumer Shift to Quality Prompts S&P to Cut GM Debt Deeper into Junk
By James B. Bleeker
On December 12, 2005, Standard & Poor's cut its creditworthiness rating of General Motors Corporation's long-term debt two notches to "B" from "BB-." The following table puts S&P's cut and current rating of GM debt into perspective.
Table I S&P, Fitch, and Moody's Long-Term Debt Ratings as of December 12, 2005 Ratings Automobile Manufacturers Investment Grade Ratings AAA Toyota Motor Corporation AA+ AA AA- A+ Honda Motor Company A A- BBB+ BBB DaimlerChrysler AG BBB- Ford Motor Company Junk Grade Ratings BB+ Ford Motor Company, Ford Motor Company BB BB- B+ General Motors Corporation, General Motors Corporation B General Motors Corporation B- CCC+ CCC CCC- Delphi Corporation D The rating denominations are those used by S&P and Fitch. Within the past two years, S&P's rating of GM's long-term debt has tumbled from "BBB," where DaimlerChrysler AG's debt presently resides, to where it is today. Nearly all of this precipitous decline has occurred within the past year.
S&P retained its negative outlook on GM debt, meaning that it may cut GM's debt rating further without advance warning.
S&P noted GM's U.S. market share erosion as explanation for its action.
For more than a decade, U.S. consumers have been abandoning GM's and Ford Motor Company's products for the quality products of Toyota Motor Corporation and Honda Motor Company, and in the past two years the pace of this abandonment has quickened, maybe doubling or more. (See Table II of "In November 2005, U.S. Consumer Shift to Quality Undeterred by Big 3 Discounts: Reliable 2 Set New November Sales Records, GM and Ford Sales Plunge," Auto on Info, December 2005.) As it would likely take decades of determination and effort to significantly narrow the quality gap between the Big Two and the Reliable Two (see Extrapolations of the Great Gaps), GM is left with but one choice: Cut productive capacity to match dropping demand. Although this is normally a clear-cut business solution that puts things back into balance, it's not for GM. GM's current contract with the United Auto Workers obligates it to pay furloughed employees most of their wages, whether working or not. As a result, General Motors may exhaust its cash before its contract with the UAW expires in 2007. Without cash to pay its bills, GM would be forced into bankruptcy reorganization. Once there, GM's board and CEO may have no alternative but to request the court to convert its bonds into shares (preferred, common, or some combination of both), the market value of each of which may be but a small fraction of the face value of the preceding bond.
S&P's cut in its rating of GM's long-term debt puts prospective buyers of GM bonds on notice that S&P has assessed these possibilities as having an increased likelihood of becoming reality.
Nonetheless, for the determined optimist, it should be noted that if GM stocks and bonds lack toxic chemicals, they may always be used as a weed inhibitor in the holder's vegetable garden.
Sources for S&P rating cut: "S&P Cuts GM Debt Rating Deeper into Junk," the Associated Press, December 12, 2005, available at Yahoo! News, "GM Bankruptcy Possible: S&P," Dena Aubin, Reuters, December 12, 2005, available at Yahoo! News, "S&P Lowers GM Rating," Sarah A. Webster, Detroit Free Press, December 13, 2005, at http://www.freep.com/apps/pbcs.dll/article?AID=/20051213/BUSINESS01/512130302/1014/BUSINESS01, "S&P Further Cuts GM's Credit Rating," Lee Hawkins, Jr., The Wall Street Journal, December 13, 2005, p A3
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