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Fitch Says GM Bonds Junk Too
By James B. Bleeker
Fitch joined Standard & Poor's by lowering General Motors Corporation's long-term debt rating to junk, although it put GM's bonds at one notch into junk (BB+) while S&P earlier in the month had put them two notches into junk (BB). (See Auto Manufacturer Financial Stature and "With U.S. Consumer Shift toward Quality Unabated, S&P Cuts GM and Ford's Debt to Junk," Auto on Info, May 2005.)
Fitch also gave GM's bonds a negative outlook. This means that it can lower GM's debt rating further without advance notice.
Now that two of the three major credit rating agencies - Fitch, S&P, and Moody's Investors Service - have lowered GM's long-term debt to junk, it will be dropped from the Lehman Brothers Index, for investment-grade debt, in July, pursuant to new rules that Lehman Brothers announced earlier this year. Under the old rules, once either S&P or Moody's dropped a bond group into junk, the drop would prompt Lehman Brothers to dump the group from the index. However, when GM's bond ratings approached junk, it changed the rules, a move widely viewed as an effort to protect GM's creditworthiness. However, the effort proved fruitless.
Once General Motors' bonds are dumped from the Lehman Brothers Index, many institutional investors will be unable to hold the bonds in their portfolios. However, since it appears that many analysts had anticipated the dual junk rating, likely many institutional investors have already discarded GM bonds; this makes a major drop in value of these bonds in the very near term unlikely.
General Motors has long suffered from a consumer shift out of its products and into the quality products of Toyota Motor Corporation and Honda Motor Company. However, in the past year, the consumer shift out of GM products and into those of the Top Four - Toyota, Honda, the Subaru division of Fuji Heavy Industries, Ltd., and Nissan Motor Company - has accelerated. (See "In the U.S. in April 2005, Quality Four Sales Soar, GM and Ford Continue Free Fall," Auto on Info, May 2005.) In the January-March quarter, this accelerated shift toward quality helped cause GM to report a sizable loss.
Nonetheless, General Motors Corporation appears to be confident that it can stop the plunge in its U.S. sales and market share without improving quality. In a Wall Street Journal, May 23, 2005, article entitled "Struggling GM Rolls Out a New Marketing Strategy," Mark LaNeve, GM's head of North American sales, service, and marketing, mentioned more advertising, more local initiatives, more local discounts, offering fewer models, and remodeling dealerships as tools for improving sales and earnings.
As a solution set, Fitch didn't buy it.
To site manager, it seems likely that the only solution is a strategic Chapter 11 reorganization and that GM's executive staff, assuming a semblance of competence or better, has an approximate date of filing the petition. In the meantime, GM has nearly $20 billion to throw to the wind.
Source for GM long-term debt rating change: "Fitch Cuts GM Credit Rating to Junk Status," the Associated Press, May 24, 2005, available at Yahoo! News and "GM Debt Bumped to 'Junk' by 2nd Agency," Reuters, May 24, 2005, available at Yahoo! News
Source for GM's revival strategy: "Struggling GM Rolls Out a New Marketing Strategy," Wall Street Journal, pp. B1 and B4, May 23, 2005
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Correction: Per the Journal, Lehman Brothers' old rules remain in effect until July1. Consequently, S&P's cut of GM's long-term debt rating to junk mandates removal of GM bonds from the Lehman Brothers Index of investment-grade debt as of June 1, and Fitch's cut of the same to junk keeps them off the list July 1 and thereafter.
Source: "Fitch Downgrades GM Debt to Junk," Aparajita Saha-Bubna, Wall Street Journal, May 25, 2005, p. C5
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