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Cuts GM's Debt Rating to One Notch above Junk
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Info Sources The Wall Street Journal BusinessWeek The Economist Laptop Computers Fine Jewelry Women's Watches by Dima To view more women's watch items, icons, and search phrases, click here. Auto on Info October 2004
S&P Cuts GM's Debt Rating to One Notch above Junk
On October 15, 2004, the credit rating firm Standard & Poors downgraded the long-term debt of General Motors to triple-B-minus, one notch above junk. S&P attributed the cut to declining market share and poor profitability, including a multi-year string of losses in Europe.
S&P had cut Ford Motor Company's long-term debt rating to one notch above junk earlier this year. Both currently hold a triple-B-minus long-term debt rating, the lowest S&P debt rating ever accorded GM and Ford.
The Wall Street Journal reported that in a conference call on October 16th, Scott Sprinzen, S&P's managing director, stated that "the rating firm seriously debated whether GM and Ford should continue to carry investment grade credit ratings."1 This raises the question as to whether S&P will cut GM's and Ford's credit ratings to speculative grade shortly. However, John Croft, a bond analyst for Eaton Vance Corporation, said that he does not expect such a downgrade within the next six months.
In the short term, a cut to junk would only affect the value of existing corporate bonds held by bondholders. However, as long term debt matures, GM and Ford will be forced onto the market for additional financing that would require higher interest rates for prospective bondholders to be willing to bear the additional risk. This would increase GM's and Ford's interest expense - a potentially very burdensome expense, as the corporate debt of each far exceeds the value of its common stock. This, in turn, might force a reduction or elimination of dividends, not good for the value of common stock.
1 "GM Cuts Forecast Over Health Costs," Wall Street Journal, October 15, 2004, p. A3
Sources of information: "GM Cuts Forecast Over Health Costs," Wall Street Journal, October 15, 2004, p. A3 and "GM Ratings Cut Leads Investors to Assess Risk," Wall Street Journal, October 15, 2004, p. C4
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