Moody's Spoils Ford-GM Party

Once again, credit issues steal the headlines from a rare good news day in the domestic auto sector.
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Bad credit ratings are once again raining on Detroit's parade.

The last time the stock market got good news about the ailing U.S. automakers -- when Vegas mogul Kirk Kerkorian disclosed his

doubling down on GM shares back in May -- Standard & Poor's responded by downgrading GM and

Ford

(F) - Get Report

debt to junk status.

Wednesday afternoon, with

hopes running high that labor concessions are on the way from the United Auto Workers union, Moody's Investors Service got into the act. The agency

slashed its ratings on Ford and GM to junk. By now, only one of the three big rating agencies has an investment-grade rating on either company: Fitch still rates Ford a step above junk.

Moody's cut its ratings on GM's senior unsecured debt by two levels, to Ba2 from Baa3, and its short-term rating to not prime from Prime-3. The ratings firm also assigned a Ba2 corporate family rating and an SGL-1 speculative grade liquidity rating.

General Motors Acceptance Corp. also got lowered, as Moody's dropped its senior unsecured debt rating to Ba1 from Baa2 and its short-term rating to not prime from Prime-2. The rating outlook for both companies is negative. About $170 billion of GM debt is affected by the ratings cuts.

It also cut Ford's senior unsecured debt one notch to Ba1 from Baa3, and assigned a Ba1 corporate family rating, along with an SGL-1 speculative grade liquidity rating. Moody's also lowered the ratings of Ford Motor Credit's senior unsecured debt to Baa3 from Baa2 and the short-term rating to Prime-3 from Prime-2.

The rating outlook for both companies is negative. The Moody's downgrade affects about $150 billion of Ford debt.

Both stocks were on a tear earlier after

The Wall Street Journal

reported that United Auto Workers Vice President Richard Shoemaker indicated that the union is now considering helping ailing GM in its latest bid to cut costs.

GM's chief financial officer, John Devine, has made seeking cuts in the company's soaring health care and legacy costs for union workers a cornerstone of his turnaround plan. With the company's market share in decline and its sales and earnings plunging, top-line cost-cutting is widely viewed by shareholders as the key to shoring up the company's share price.

Many observers believe that the potential for concessions from organized labor played a major role in Vegas tycoon Kerkorian's decision to boost his stake in GM. Kerkorian offered investors $31 a share for their GM stock in early May, when the stock was trading around $26.

Any benefits to GM from labor concessions would reflect well on Ford's prospects as well. The two competitors, both falling prey to intense competition from foreign manaufacturers, are in a similar predicament, as evidenced by the simultaneous debt-rating downgrades.

Shares of GM reached a high of $35.02 early Wednesday, up almost 4.5%. After the downgrade, they closed up 75 cents, or 2.2%, to $34.27, and they were down 0.8% in after-hours trading.

Ford shares went as high as $10.08 during the session, up 2.8%. They closed up 12 cents, or 1.2%, to $9.92, and they were recently down after hours by 1%.