Updated from 2:41 p.m. EST
In moves that were seen by many as inevitable, Standard & Poor's on Thursday lowered its ratings on the debt of
to speculative grade, or junk, status.
Shares of both companies slid more than 5% in the wake of the cuts, one day after rallying when a private investor offered a rich price for a big slug of GM stock. The S&P downgrades also sent broader stock averages down as much as 1% and roiled corporate bond markets, where many fund managers will now be prohibited from owning GM and Ford.
"This is the beginning of the end of the U.S. auto industry as most people have come to know it," said Sean Egan, managing director of Egan-Jones Rating Co., an independent firm. "In another two years, we're likely to see substantial layoffs and bankruptcy filings by possibly one or both of these companies and massive restructurings of most of the U.S. auto manufacturers."
S&P lowered its long- and short-term corporate credit ratings on GM and its finance affiliate, General Motors Acceptance Corp., to BB/B-1 from BBB-/A-3; a rating below BBB is considered junk. In addition to the two-notch downgrade, S&P maintained a negative outlook on GM and GMAC.
"The downgrade to non-investment-grade reflects our conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages," S&P said in announcing the downgrade. "Of greatest immediate concern is that GM's sport utility vehicles (SUVs) will no longer be as profitable as they have been in recent years."
The credit rating agency said the tender offer announced Wednesday by Kirk Kerkorian's
"represents an additional uncertainty" but was "not a factor at all in the current rating action."
In a separate but related action, S&P cut its long- and short-term ratings on Ford and its Ford Motor Credit affiliate to BB+/B-1 from BBB-/A-3. As with GM, the credit rating agency maintains a negative outlook on Ford.
While the moves were widely anticipated, several market sources said they came sooner than expected. The market retreated from small gains held throughout the first half of the day, although it pared its losses late in the session. The
was recently down 25 points, or about 0.3%.
"These are very large credit issues in the market, and when they're cut, many insurance companies, pension funds, and endowments can no longer hold these bonds by virtue of the investment policy of a particular institution," said Hugh Johnson, chief investment officer with First Albany. "They're now under pressure to sell these bonds, and this could cause a decline in other bond prices and raise the borrowing costs for many companies.
"This may have been widely anticipated, but it's when it actually happens that investors are required to take action," Johnson added.
In one instance of the havoc created by the downgrade, Egan said, the closely watched Lehman Brothers Investment Grade Bond Index should take a hit, since a downgrade from S&P will remove GM and Ford, two huge components. The companies have a combined $500 billion of outstanding debt.
That will, in turn, cause widespread reshuffling of bond holdings in both investment grade and junk bond portfolios, since many fund managers mimic the Lehman index.
Currently, Lehman uses the lower of S&P and Moody's long-term credit rating in determining whether an issue is investment grade. Starting July 1, however, the index will start to consider the opinion of a third agency, Fitch. GM and Ford are currently rated just above junk at Moody's and Fitch.
"If this came from S&P after that date, the companies would remain on the index, so a lot of people are surprised this is happening now, and there's some scrambling going on," Egan said.
By the same token, Ford and GM could both return to the investment-grade index on July 1 if neither Moody's nor Fitch downgrades them before that.
After rallying 18% Wednesday on news of the Kerkorian tender, GM shares were recently down $1.77, or 5.4%, to $31.03, giving up about one-third of yesterday's gain.
In a statement read to wire services, GM said it foresees no funding crisis in the wake of the downgrade.
"We're disappointed with S&P's decision to lower the credit rating for GM and GMAC," the company said. "GM and GMAC have adequate cash and liquidity to fund their business for the foreseeable future."
Ford was more direct in its response to the move, saying it disagreed with the downgrade while touting the success of new models.
"As a company, we clearly see the competitive realities and challenges we face, and are committed to addressing them through the acceleration of our business plans, which will include continued cost-cutting, as well as essential investments in our future," Ford said.
"While today's development presents a challenge, it doesn't shake our confidence in our future or our determination to achieve continued success as a global auto maker."
Ford stock was recently down 43 cents, or 4.2%, to $9.73. They touched $9.46 earlier.
Thursday's action could force restructurings at both automakers. In the past, GM has publicly acknowledged it was considering separating its financing arm, GMAC, from its auto business, in order to preserve its borrowing options.
"This could rush that process along," Egan said. "GM and Ford's borrowing costs are going to increase significantly, and this is going to hurt their ability to help their suppliers, who are in bad shape as well."
The downgrades put a prompt end to the euphoria created by Kerkorian's above-market bid for 5% of GM. The casino tycoon and one-time Chrysler suitor offered Tuesday to increase his stake in the auto company from 3.9% to 8.9%, buying shares for $31 a share (they were previously trading at around $28).
That announcement led to an 18% rally in the stock and a flurry of upgrades on Wall Street as traders speculated that Kerkorian had a value-play in mind.
Despite the selling, GM's share price still remains above Kerkorian's bid.