S&P cuts GM, Ford debt ratings to 'junk' status

[MORTARDUDE]

S&P cuts GM, Ford debt ratings to 'junk' status
By Sharon Silke Carty, USA TODAY
DETROIT ? The day after General Motors' shares soared on news that activist investor Kirk Kerkorian intended to double his investment in the ailing automaker, ratings firm Standard & Poor's said Thursday it is cutting GM (GM) and Ford Motor (F) debt ratings to junk status.
That isn't likely to affect either company immediately ? both have enough cash to fund operations for a while ? but it signals to investors doubt the automakers can pull out of their skid. More significantly, it could hurt the profits of their financing arms, which lately have tended to earn more than car operations.

GM's shares dropped 6% Thursday to $30.86. Ford's fell 4.5% to $9.70.

S&P analyst Scott Sprinzen said GM and Ford are betting too much on the prospect that the SUV market will pick up when they introduce new models.

Year-to-date, SUV sales are down 1.7%. "What we have is a decline in the product segment that represents one of the substantial sources of earnings for these two companies," says Sprinzen. They "will not be able to look to mid- and large-sized SUVs the way they have over the last decade for much of their earnings and cash flow."

GM and Ford said they were disappointed, although S&P had indicated for several months that it was on the brink of cutting the ratings. "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 automaker," said Ford CFO Don Leclair.

A spokeswoman for Kerkorian's investment company, Tracinda, said he still plans his offer for GM shares.

Here's how the S&P's action will likely affect the automakers:

? Interest rates. GM and Ford will have to pay higher rates to borrow money on the unsecured-debt market. That's where investors buy debt from the automakers with no guarantee of being repaid. The companies will still have access to the secured-debt market, where they have to list some assets as a repayment guarantee.

? Union negotiations. S&P's decision could help GM and Ford win concessions from the United Auto Workers union on health care costs, plant closings and other cost-cutting maneuvers. The new debt status sends a clear message to the union, white-collar workers and dealers, that they "need to be more flexible and need to understand that adjustments have to be made with some urgency," says Dana Johnson, chief economist for Comerica Bank.

? Car loans. The GM and Ford financing arms may charge consumers higher rates for car loans once Ford and GM start paying higher interest rates themselves, says Brett Hoselton, an analyst at KeyBanc Capital Markets. Buyers could turn to other lenders.