A Deeper Rut for GM and Ford
"Articulo de la base de datos de la uclm"
Junk status for the two auto giants' debt will mean higher interest
costs, further cutting into the beleaguered outfits' profits
General Motors (GM) and its shareholders had been bracing for the bad
news. But Ford Motor (F) and its stockholders thought a cut to the
outfit's credit rating was a little farther down the road. On May 5,
Standard & Poor's downgraded the debt of both carmakers to junk status
(see BW Online, 5/5/05, "GM and Ford: To the Junk Yard").
GM took the bigger hit, with its debt downgraded two notches, to BB, and
Ford one notch, to BB+. Says Jack Malvey, chief global fixed income
strategist at Lehman Bros: "It's a sad day for Corporate America to see
two blue-chip companies sink beneath the waters of investment grade."
CAUGHT UNPREPARED. The news could put GM shareholders on a wild
roller-coaster ride. The stock shot up 18% on May 4 after billionaire
Kirk Kerkorian announced that he would boost his stake in GM to almost
9%. Investors took the news as a sign that either Kerkorian sees
something in GM's long-depressed shares that they don't, or that he'll
try to make something happen (see BW Online, 5/5/05, "Just What GM
Needs"). However, GM shares fell 6% after the downgrade, to close at
$30.86 on May 5.
Ford is now in a tight spot as well. It didn't expect a downgrade so
soon and issued a statement disagreeing with S&P's action. Its stock
fell 4.5%, to $9.70, on the news.
Unlike Kerkorian's surprise announcement, neither credit downgrade came
as welcome news for investors. For GM, the rating will boost borrowing
costs, thus hurting profits from the auto giant's GMAC finance arm. And
S&P analyst Scott Sprinzen questions whether GM's redesigned full-size
SUVs -- the Chevrolet Tahoe and Suburban and GMC Yukon -- can really
make the big impact that management is hoping for.
RELYING ON GMAC. "Sales of its midsize and large SUVs have plummeted,
and industrywide demand has evidently stalled, partly because of high
gas prices," Sprinzen says. "Competition has intensified due to a
proliferation of new SUVs." The vehicles are expected to be rolled out
early next year.
With the auto business likely to lose money in 2005, GM is relying on
its GMAC unit to come up with about $2.5 billion in annual profits and
pay a $2 billion dividend to the parent company. That may not be enough
to keep the auto company in the black, but it will mitigate the losses
and cash burn.
Ford's finance earnings will also take a hit. The company has given
earnings guidance for this year of $2.3 billion to $2.7 billion. But
most of that will come from Ford Credit. The auto business will at best
break even. With rising borrowing costs, its guidance has sunk to an
iffier proposition.
"BEST LIQUIDITY EVER." Unlike GMAC, Ford Credit doesn't have a mortgage
business. While GMAC can rely on home loans -- possibly made with more
cheaply borrowed capital -- Ford Credit makes its money writing car
loans. Says Rochdale Securities research director Nick Colas: "Ford
Credit does not have the diversity GMAC has."
Anyway you look at it, the downgrade will make life for GMAC and Ford
Credit difficult going forward. At GMAC borrowing costs have already
risen, jumping to an average of 4.3% in the first quarter, compared with
3.62% in the first quarter of 2004, due in part to a pair of downgrades
over the past few years.
GMAC already was using less bank and bond debt to raise loan capital,
perhaps anticipating the rating downgrade. Instead, GM has been
packaging up loans and selling them in the asset-backed securities
market. GM also has become an originator of loans, selling them directly
to banks that need a source for auto loans. "Our outlook remains
strong," said GMAC's CFO Sanjiv Khattri in March. "We enter the second
quarter with our best liquidity ever."
PROTECTIVE MOVES. Its GMAC Bank has already raised $1 billion by taking
deposits from consumers. And GM now raises at least two-thirds of its
roughly $40 billion in funding from sources not affected by the credit
downgrade. Plus, the finance unit has $18.5 billion in cash.
GM also made the right moves to protect GMAC's mortgage business, which
accounted for $385 million of GMAC's $728 million in first-quarter
profits. On May 4, GMAC walled off the mortgage business by placing it
under a separate holding company called Residential Capital Corp. It may
get a separate credit rating.
Ford, too, had already been moving to protect Ford Credit from a
downgrade. The company expects to raise between $16 billion and $25
billion by selling securitized loans, rather than using
interest-sensitive borrowing. That should be about two-thirds of its
funding needs. But Ford will still get between $6 billion and $10
billion in more traditional debt, which will likely be more expensive.
No joy in Motor City today.
By David Welch
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