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Fitch Lowers GM to Junk

The rating agency cites declining North American sales.
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Another major rating agency Tuesday dropped

General Motors'


debt to junk status, sealing the company off from investment-grade bond markets.

Fitch Ratings, the No. 3 agency behind Standard & Poor's and Moody's, cut both GM and its finance arm, GMAC, to BB+ Tuesday, its highest non-investment grade. The outlook remains negative.

"The action reflects the continuing decline in GM's North American sales of key mid-size and large SUV products, increasing product and price competition in the large pickup market, and the corresponding impact of these two segments on consolidated profitability," Fitch wrote.

GM and GMAC had previously been rated BBB-, Fitch's lowest investment grade.

GM's stock, which has been supported by a partial tender offer by investor Kirk Kerkorian, was recently down 95 cents, or 2.9%, to $31.64. The stock is down 18% on the year, battered by a mid-March profit warning in which GM said it would produce as much as $2 billion of negative cash flow this year.

"The writing was on the wall after the prior downgrade," said Michael Sheldon, chief market strategist at Spenser Clarke. "The yield spreads are at such high levels that we are likely to see some stabilization and might see a buying opportunity for investors."

In downgrading GM, Fitch said the automaker's cash flow problems won't be solved next year.

"Fitch believes that declining volumes and profitability, coupled with a lack of tangible progress in attacking manufacturing and legacy costs, will result in negative cash flow through at least 2006," Fitch wrote.

The ratings action, which is nearly identical to a move by S&P on May 5, is significant because it means GM has virtually no chance of remaining in the Lehman Brothers Investment Grade Bond index when the index's parameters change in early July. Starting then, Lehman will consider ratings from Fitch in addition to S&P and Moody's in determining which companies qualify for the index.

Still, few analysts expect a mad dash for the exits among owners of GM debt.

"The negative impact of the Fitch downgrade is less than people think," said Marty Fridson, publisher of

Leverage World

. "Some GM paper was being sold before the downgrades and the rigidity of rules to sell immediately after the downgrade or at all are highly overststated by many. The Fitch action by itself will not drastically change the situation, the only thing it confirms right now is the removal from the Lehman Index. People still have strong views on GM debt."

Moody's still rates GM investment grade. The agency downgraded



on May 12, but spared it from junk. Fitch took a similar action last Thursday.

Ford was recently down 12 cents, or 1.2%, to $10.05.

The cuts mean that mutual funds that hold only investment grade debt will be forced eventually to divest their GM bonds. Both Ford and GM will be removed from the Lehman Index, which many funds track, at the end of this month (although Ford will presumably return to it in July). According to Miller Tabak data, $44.9 billion in Ford bonds are slated to fall out of the index at month end and $45.1 billion in GM.

While S&P's downgrade of GM hammered the stock market and led to rumors of hedge fund losses, Fitch's move proved a non-event for other securities.

"We will continue to see volatility in the high-yield market and investors will keep a close eye on Ford," said Sheldon. "Outside of the auto sector, the overall credit market is in decent shape, core balance sheets are strong and well-positioned. Investors are looking at the debt in the auto sector as an isolated incident."