GM Falls to 13-Year Low
GM's corporate debt has been trading at junk spreads for several weeks and those spreads widened sharply as Standard & Poor's lowered its outlook on GM and its finance arm to negative from stable, setting the stage for a possible downgrade of the world's biggest carmaker to official junk status, which could have widespread implications for the corporate bond market.
"My guess is that all the rating agencies are probably going to knock the company's rating down one more notch to junk," said Healy.
The companies plans to dig its way out of this hole will probably focus on its North American auto operations, since the company said Wednesday's guidance reflects "lower North American sales and production volumes, a tougher pricing environment, and a more car-based sales mix. At the same time, GM's other automotive regions and GMAC are all on track to meet or beat their 2005 net income targets."
For the last three years, GM has derived the lion's share of profit from its financing arm, General Motors Acceptance Corp. In its release Wednesday, the company said GMAC "is on target to exceed expectations" despite higher interest rates and wider spreads."Much of GMAC's success stems from its ability to diversify its funding sources," GM said in a release. "We're confident that GMAC can continue to sustain strong levels of profitability." GM has reportedly weighed a spinoff of GMAC in recent months as a way of shielding the parent's corporate credit rating from the possibility of a ratings-agency downgrade. Barry Ritholtz, chief market strategist with the Maxim Group and a contributor to RealMoney.com, said he would consider buying shares of GM in the low $20s. But he is concerned about the survival of the company's dividend, which currently offers a yield of 5.9%. "Is the dividend safe?" Ritholtz asked. "I've got to think that if they're announcing a $1.50 [per share] loss, the dividend is in danger. "This is all just a continuation of years and years of terrible management, uncompetitive brands, a high fixed-costs structure, and bad cars," Ritholtz added. "There's no other way to say it."
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