GM, Ford Bond Ratings Cut to Junk Status

A spokeswoman for Kirk Kerkorian said the billionaire's offer to invest $868 million in General Motors Corp. still stands. (Reed Saxon -- AP)

The two biggest U.S. automakers had their bond ratings slashed to junk status yesterday by Standard & Poor's, as the rating service released a grim report on the business outlook for General Motors Corp. and Ford Motor Co.

The slip might have been expected after weeks of financial trauma at GM and Ford, but yesterday's announcement caught Wall Street off guard and caused both companies' stocks to drag down the whole market.

"It's a big psychological impact on the bond market and on investor psychology," said David B. Healy, an auto industry analyst at Burnham Securities Inc.

The news humbled two proud symbols of U.S. industry, both of which have lost market share to Asian competitors and are struggling with health care and production costs. The biggest single cause of the companies' financial problems, S&P said in its report, is the mighty sport-utility vehicle. Both Ford and GM make much of their profits on SUVs and relied on the nation's appetite for them to hold off overseas competition during the 1990s.

But high gasoline prices and consumer whims are turning the market against large SUVs, and GM and Ford have been caught flat-footed, with "severe ramifications," S&P said in its report.

The drop to junk status will increase the cost of borrowing and limit the companies' access to certain credit, but experts said that GM and Ford have enough cash on hand in their automotive businesses to shield them from that problem for some time.

Their finance arms stand to be more immediately affected because they are constantly seeking money to support loans, but both have been working to diversify their sources of funding and should be secure for now, S&P said in its report.

In fact, both companies argued yesterday that those factors showed that S&P was wrong to downgrade their ratings.

"We disagree with S&P's action today," Ford Chief Financial Officer Don Leclair said in a news release, citing the company's liquidity and access to various funding sources. "While today's development presents a challenge, it doesn't shake our confidence in our future or our determination to achieve continued success as a global auto maker."

Ford's rating dropped a single notch, to the highest non-investment grade of "BB-plus," with a negative outlook. S&P took GM down two notches, to "BB," also with a negative outlook.