General Motors Corp.'s debt rating was cut another level below investment grade by Fitch Ratings on concern that the automaker hasn't done enough to end losses and reduce North American operating costs.
GM's rating was reduced to B from B+, Fitch said in a statement today. The rating, now five levels below investment grade, has a ``negative'' outlook, meaning Fitch may downgrade GM again. Fitch said GM bondholders will recover 30 percent to 50 percent if the automaker declares bankruptcy. Fitch didn't cut the BB rating for GM's finance unit.
``The downgrade emphasizes to the market that North American operations are fundamentally broken and need repair,'' Pete Hastings, a fixed-income analyst at Morgan Keegan in Memphis, Tennessee, said in an interview. GM, the world's largest automaker, said today that it planned to cut second-quarter North American production 3.7 percent from a year earlier after its U.S. sales fell 2.5 percent in February.
GM Chief Executive Officer Rick Wagoner is trying to end losses that totaled $8.55 billion last year by closing plants, eliminating jobs and reducing health-care and pension benefits for workers. Wagoner, who took a 50 percent pay cut this year, says he expects to reduce operating costs $7 billion annually by the end of this year.
Fitch said the automaker may have negative cash flow through the end of next year. The Chicago-based rating company also said it is concerned that if losses continue and results don't improve, parts suppliers might begin to limit the automaker's access to credit. Fitch said it has seen no evidence of that occurring.
New York-based Moody's Investors Service cut GM one level, to five steps below investment grade, last week on concerns about the success of cost-cutting efforts.
Wagoner said earlier today at the Geneva auto show that the automaker has enough liquidity and doesn't need to complete a sale of a majority of its finance unit this year.
``The liquidity position of the company is very strong,'' Wagoner said when asked if GM could go into 2007 without a sale of a majority of its General Motors Acceptance Corp. finance unit. ``The auto company has massive liquidity, and the finance company has massive liquidity,'' he said. GM has more than $19 billion in cash, not including GMAC cash balances.
GM has been searching since October for a buyer of 51 percent of GMAC to regain an investment-grade credit rating for the unit after the auto parent was cut to junk last year. Moody's said last month the delay in a sale suggests ``difficulty'' in setting terms that would boost GMAC's credit quality.
Offer for GMAC
Cerberus Capital Management LP and Citigroup Alternative Investments, a Citigroup Inc. buyout unit, made an offer Jan. 30 for part of GMAC, according to a person with direct knowledge of the matter. Wachovia Bank, the fourth-largest U.S. bank, dropped out of a competing bid with Kohlberg Kravis and Roberts & Co., people familiar with the talks said last month.
GMAC Chief Executive Eric Feldstein presented slides to analysts in January that demonstrated GM is considering alternative scenarios where GMAC would remain non-investment grade this year and would shrink the amount of loans on its books and have reduced earnings.
``It has been harder to do than they wished,'' Sean Egan, managing director of Egan-Jones Ratings Co. of Haverford, Pennsylvania, said in an interview today about the GMAC deal. ``We think they will end up doing a deal with a private equity firm, not a bank, for the simple reason that there will probably be significant losses that need to be reported by a buyer and a private equity buyer doesn't care about that.''
Prices of GMAC debt have erased most of an advance since October, when Wagoner first said a majority stake in the unit was for sale.
GMAC's 8 percent coupon bonds maturing in 2031, which closed as high as 107.25 cents on the dollar on Oct. 24, traded at 91 cents on the dollar today, down from 92.5 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the NASD. The yield has risen to 8.9 percent from 7.4 percent in October and 8.7 percent yesterday. Yields move inversely to bond prices.
Any transaction would need to take account of the relationship between the automotive business and the financing operations, Wagoner said. Discussions are ``proceeding,'' he added, without providing details about possible buyers or a time for the sale.
GM's assets are structured so that maturity is shorter than the maturity of the company's liabilities, helping maintain a positive cash flow in the event the carmaker doesn't expand its business.
Above the Parent
GMAC, which represents more than 80 percent of GM's unsecured debt and listed $142 billion in unsecured debt at the end of September, has been rated higher than its parent by Fitch and Standard & Poor's since October. Moody's, S&P and Fitch, the world's three biggest credit-rating companies, all said Feb. 3 that they're unlikely to give GM's finance unit an investment-grade rating unless it's partly owned by a bank.
The automaker's shares fell 40 cents to $19.91 at 4:04 p.m. in New York Stock Exchange composite trading, the lowest close since Jan. 17. The shares have risen 2.5 percent this year.
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