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GM, Ford Bond Ratings Cut to Junk Status

GM was "disappointed" by the rating agency's action, said Jerry Dubrowski, a company spokesman. The company is "firmly committed to improving its performance as quickly as possible, and today's decision will not deter GM from achieving its objectives," he said.

On Wednesday, Kirk Kerkorian announced an offer to invest $868 million in GM, increasing his stake in the company to nearly 9 percent from 4 percent and making him one of its biggest shareholders. Yesterday a spokeswoman for the billionaire's Tracinda investment company said the offer still stands.

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

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Kerkorian's offer had given a quick boost to GM stock, which has been falling because of recent announcements that the company expects to miss financial targets and lose money in the coming months. Yesterday, GM shares fell nearly 6 percent to close at $30.86, and Ford stock lost 4.5 percent to close at $9.70 per share.

S&P said both GM and Ford are in risky financial positions for some time to come. Both companies have been losing market share to Asian rivals Toyota, Honda, Nissan and Hyundai, even as the overall number of new vehicles purchased each year in North America has hovered at record highs. Rising interest rates could keep the market from growing much more, the ratings agency said, and any reduction in demand "would be a traumatic event for GM and Ford."

More ominously, sales of medium and large SUVs declined last year and are down more steeply so far this year. North Americans bought 17.1 percent fewer large SUVs in the first three months of this year than in the same period in 2004, according to S&P. Buyers increasingly prefer "crossovers" -- small, car-like SUVs -- but many of the new products Ford and GM plan for the next two years are big trucks.

And Americans seem to simply show a bias against Detroit's products. Both companies "have made clear progress in improving vehicle quality and durability," the S&P report said, "but the U.S. consumer has been slow to recognize this." So while Ford and GM have gone to great lengths to cut costs and become more efficient, their declining sales have kept them from seeing extra profit.

At the same time, Ford and GM are burdened with significantly higher health care and pension costs than foreign-based rivals, and their unionized work forces have shown little inclination to restructure contracts to ease that pressure. The companies will have to address those costs, as well as make significant cuts to their oversized North American production capacity, to get on more solid footing, the ratings agency said.

Analyst Healy said the report could "cause you to develop an ulcer," but that he found it right on target. The companies can withstand the credit humiliation for the short term, he said, but they have serious work to do to become healthy again. "And I think it will get worse before it gets better," he said.

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