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Moody's Cuts GM and Ford Debt to Junk
By James B. Bleeker
Moody's Investors Service cut the credit rating of the long-term debt of General Motors Corporation to two notches into junk and gave GM's debt a negative outlook, meaning that it may cut GM's debt further without advance notice.
In May, Standard & Poor's had cut GM's long-term debt rating to two notches into junk and Fitch had cut GM's long-term debt rating to one notch into junk. (See "With U.S. Consumer Shift toward Quality Unabated, S&P Cuts GM and Ford's Debt to Junk," Auto On Info, May 2005 and "Fitch Says GM Bonds Junk Too," Auto on Info, May 2005.) As Moody's was the last of the three to rate GM's long-term debt junk, the impact will likely be minimal.
Moody's also cut the credit rating of the long-term debt of Ford Motor Company to junk status, but only one notch into junk, and also gave Ford's debt a negative outlook with similar implication.
Standard & Poor's had already cut Ford's debt to one notch into junk in May, but Fitch had placed it one notch out of junk. (See "With U.S. Consumer Shift toward Quality Unabated, S&P Cuts GM and Ford's Debt to Junk," Auto On Info, May 2005 and "Fitch Cuts Ford Debt, But Not to Junk," Auto on Info, May 2005.) As Moody's became the second major credit rating agency to classify Ford's long-term debt junk, by Lehman Brothers Holdings, Inc.'s current rules Ford's long-term debt will be dropped from its index of investment grade debt. This may increase the interest rate Ford must offer on new long-term debt, as many institutional investors are restricted in their purchases of debt instruments to instruments on Lehman Brothers' index. Also, Moody's rating cut alone may increase the interest rate Ford must offer on new long-term debt, as such a cut reflects an assessed reduced creditworthiness and increased risk of losing interest and principal.
Sources for Moody's rating cut: "Moody's Cuts General Motors, Ford Debt," Associated Press, August 24, 2005, available at Yahoo! News, "Moody's Rates GM, Ford Stock Junk," Bill Koenig, Detroit Free Press, August 25, 2005, http://www.freep.com/money/autonews/moodys25e_20050825.htm, and "Moody's Downgrades GM, Ford Credit Ratings," Christine Tierney, Detroit News, August 25, 2005, http://www.detnews.com/2005/autosinsider/0508/25/C02-292508.htm
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