S&P Downgrades Big Three: Warns of Dire 2009

Posted by: David Kiley on July 31, 2008

GM, Ford and Chrysler all had their credit ratings lowered a step further into junk status today by Standard & Poor’s (which, like BusinessWeek), is owned by McGraw-Hill).

The chief concern of the rating agency is the cash burn of all three companies due to the worsening economy, high fuel prices and consumers leaving pickups and SUVs. In fact, the ratings agency’s bombshell was that while U.S. light vehicles should run at an annualized rate of 14 million for the next 18 months, oil prices rising to $200 a barrel could drive auto sales as low as 11.7 million units next year. S&P pegged the chances of that at 20%.

Less than 12 million in sales next year would be a very difficult sales level for the Big Three to sustain, and would make it almost a certainty that one of the companies would have to seek a white-knight buyer or alliance partner.

The three U.S. automakers are each rated B- now, six levels below investment grade, S&P said. GM’s partly owned finance unit, GMAC LLC, was also lowered to the same rating.

“Liquidity for all three automakers is adequate for now, but will be significantly reduced in the second half of this year and during 2009 by continued heavy losses and cash outflows,” wrote S&P analyst Robert Schulz.

All three companies have been slashing white and blue collar salaries, reducing production and accelerating plans to replace SUVs with smaller cars. At present, all three companies have a problem of not having enough cars to meet demand and having too many trucks and SUVs with no buyers. Chrysler is especially hammered, because pickups and SUVs are 60% of sales.

July sales get reported tomorrow, Aug 1.Chrysler is already down 22 percent through June; GM’s were down 16 percent and Ford’s 14 percent as the industry declined 10 percent.

S&P removed GM and Ford from CreditWatch with negative implications, meaning it is less likely the automakers’ debt will be downgraded further below investment grade.

This is what S&P issued on the automakers’ cash burn: “We estimate GM will use as much as $16 billion from its global automotive operations this year, including cash restructuring costs and costs related to bankrupt former unit Delphi Corp. Of that amount, GM used $3.9 billion in the first quarter. We estimate Ford will burn as much as $12 billion to $13 billion from its global automotive operations this year, including cash restructuring costs. Of that amount, Ford used $4.9 billion in the first six months of 2008. Chrysler does not make its financial results public, but we expect the company to experience a net cash outflow from its automotive operations in 2008, its first full year since being acquired by Cerberus Capital Management L.P.

Reader Comments

John Doe

August 6, 2008 9:01 AM

Similarly to the fall of the Kremlin, manipulation of the masses will pre-empt the downfall of the Big Three. History has a wonderful pattern of playing out time and again. Had GM, Ford, and Chrysler focused on elavating the American economy rather than controlling the profits of these urban steamrollers, the outcome would be much different. The american economy, once known for it's engenuity would be forcing the oil producing nations to reduce the overall burden on society and eliminate carbon emmissions 100 fold. The failure of one corporate conglomerate will give way to a whole new genre of innovation and animosity.

Naresh GS

August 12, 2008 2:31 AM

Due to tight credit markets, high gasoline prices and lower consumer confidence lead to lower sales in 2Q08 to 12.5MM unit sales, which is below the estimate of 13.2MM by analysts.
However, as crude oil prices fell below $115 per barrel, can expect favorable economic condition by 2Q09 for these Big 3s.

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