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Ford
Cuts GM Lead in Race to Insolvency: Which Big Three Will Go Bust First?
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Ford Cuts GM Lead in Race to Insolvency: Which Big Three Will Go Bust First?
By James B. Bleeker
On January 11, 2006, Moody's Investors Service cut its creditworthiness rating of Ford Motor Company's long-term debt two notches deeper into junk, from "Ba1" to "Ba3." The following table puts Ford's creditworthiness and the General Motors-Ford race to bankruptcy into perspective.
Table I S&P, Fitch, and Moody's Long-Term Debt Ratings as of January 11, 2006 Ratings Automobile Manufacturers S&P, Fitch Denominations Moody's Denominations Investment Grade Ratings AAA Toyota Motor Corporation AA+ AA AA- A+ Honda Motor Company A A- BBB+ Baa1 BBB Baa2 DaimlerChrysler AG BBB- Baa3 Junk Grade Ratings BB+ Ba1 Ford Motor Company BB Ba2 BB- Ba3 Ford Motor Company, Ford Motor Company B+ B1 General Motors Corporation, General Motors Corporation B B2 General Motors Corporation B- B3 CCC+ CCC CCC- Delphi Corporation D For more than a decade, U.S. consumers have been abandoning General Motors Corporation's and Ford'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 2005, U.S. Consumer Shift to Quality Continues at Quickened Pace, But GM and Ford Avoid Disastrous Market Share Plunges with Big Discounts and Huge Financial Losses: Is a Big Three Product Worth a Dime?," 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 The Bottom Line on Auto Reliability), Ford and GM are 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 these two. GM's and Ford's current contract with the United Auto Workers obligates them to pay furloughed employees most of their wages (or all of their wages, as reported in some newspapers, but denied by a Ford employee on a Minnesota Public Radio call-in broadcast), whether working or not. As a result, General Motors and Ford may exhaust their cash before their contract with the UAW expires in 2007. Without cash to pay their bills, GM and Ford would be forced into bankruptcy reorganization. Once there, their bonds may be converted to 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.
To help cope with the prospective cash crunch, Ford is selling its Hertz Corporation rental division and General Motors is trying hard to unload a majority stake in its GMAC finance division.
The remaining gap between Ford's credit ratings and those of GM reflects a common assessment by the credit rating services that GM still holds a modest lead in its sprint to insolvency.
The following poll permits the reader to express his assessment on GM's and Ford's likely first bankruptcy filing.
To view responses to the above poll, click here
Sources for Fitch's rating cut: "Moody's Lowers Ford's Credit Ratings," Dee-Ann Durbin, the Associated Press, Detroit News, January 12, 2006, available at Yahoo! News, "Moody's Cuts Fords Ratings Deeper into Junk," ADena Aubin, Reuters, January 11, 2006, available at Yahoo! News
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