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Auto on Info September 2006
Race to Bankruptcy Tightens: Moody's and S&P Cut Ford's Debt, But GM Retains Razor-Thin Lead
By James B. Bleeker
On September 19, 2006, Moody's Investors Service and Standard & Poor's cut its creditworthiness rating of Ford Motor Company's unsecured long-term debt deeper into junk. Moody's cut its rating of Ford debt from "B2" to "B3," and S&P, from "B+" to "B." The following table puts Ford's creditworthiness and the General Motors-Ford race to bankruptcy into perspective.
Table I S&P, Fitch, and Moody's Senior Unsecured Long-Term Debt Ratings as of September 19, 2006 Ratings Automobile Manufacturers S&P, Fitch Denominations Moody's Denominations Investment Grade Ratings AAA Toyota Motor Corporation AA+ AA AA- A+ Honda Motor Company A A- BBB+ Baa1 BBB Baa2 DaimlerChrysler AG BBB- Baa3 Junk Grade Ratings BB+ Ba1 BB Ba2 BB- Ba3 B+ B1 Ford Motor Company B B2 Ford Motor Company, General Motors Corporation B- B3 Ford Motor Company, General Motors Corporation CCC+ Caa1 General Motors Corporation CCC Caa2 CCC- Caa3 Delphi Corporation (GM's jettisoned aggregation of parts plants is in Chapter 11 bankruptcy.) D S&P retained its negative outlook on Ford's long-term debt, meaning that it may cut Ford's debt rating further without advance notice. Site manager was unable to find comment on Moody's outlook on Ford's debt.
For more than a decade, U.S. consumers have been abandoning Ford's and GM's products for the quality products of Toyota Motor Corporation and Honda Motor Company, and in the past several years the pace of this abandonment has quickened, as the following charts help depict.
As it would likely take decades of determination and effort to significantly narrow the quality gap between the Big Two (GM and Ford) and the Reliable Two (Toyota and Honda) (see The Bottom Line on Auto Reliability), the Big Two were left with but one choice: Cut productive capacity to match dropping demand. Although this is normally a clear-cut business solution that puts things back into balance, it's not for these two. GM's and Ford's current contract with the United Auto Workers obligates them to pay furloughed employees most of their wages (after unemployment benefits are exhausted, per the Wall Street Journal), whether working or not. As a result, General Motors and Ford were confronted with a growing possibility that they may exhaust their cash before their contract with the UAW expires in 2007. Without cash to pay their bills, GM and Ford would be forced into bankruptcy reorganization. Once there, their bonds may be converted to shares (preferred, common, or some combination of both), the market value of each of which may be but a small fraction of the face value of the preceding bond.
To help cope with the prospective cash crunch, Ford has sold its Hertz Corporation rental division and is considering, per Reuters citing The Sunday Times1, dumping a majority stake in its Land Rover division (with a 1997-2001 Reliability Percentrank average of .02) and its Jaguar division (with a 1997-2001 Reliability Percentrank average of .35), although Ford has recently denied that it is currently considering such, and General Motors has sold, or is in the process of selling, a majority or all of its stakes in Fuji Heavy Industries Ltd., Suzuki Motor Corporation, Isuzu Motors Ltd. and GM's GMAC finance subsidiary.
GM has also offered more than 113,000 of its employees a buyout - cash to quit - ranging from $35,000 to $140,000. About 35,000 have accepted the offer. Ford is pursuing a similar route.
These steps are providing an immediate and intermediate cash cushion to soften the impact of plunging sales.
However, another problem facing Ford and GM, and to a lesser extent other auto manufacturers, is a possible strike at Delphi Corporation, GM's jettisoned aggregation of parts plants that presently supplies both GM and Ford. The strike may result from Delphi's quest to cut wages and close most of its U.S. manufacturing facilities in order to staunch its huge losses and make it a viable business enterprise. As a first step to effect the wage cut and plant closures, it has requested its presiding bankruptcy judge to release it from its contractual obligations to the UAW and its members. In mid-May, the UAW membership authorized a strike in the event that the judge grants the relief that Delphi has requested. If a prolonged strike occurs, GM and Ford would likely exhaust their cash reserves well before their present labor contracts expire and, with reserves exhausted, would be forced into bankruptcy reorganization.
The above table of debt ratings suggest that the rating agencies view GM and Ford as neck and neck in the sprint to insolvency. However, respondents to Auto on Info's Poll on the race put GM into bankruptcy in December 2006 and Ford, in post-April 2007. Only time will tell who be the more accurate and which be the winner.
Fitch Ratings has estimated the expected post-bankruptcy recovery of Ford's senior unsecured debt at 51-70%, or RR3 by its recently introduced 2005 rating categories.
1 "Ford May Sell Land Rover and Jaguar Arms," Reuters, August 6, 2006, available at Yahoo! News
Sources for Moody's and S&P's rating cuts: "S&P, Moody's Cut Ford Crdit Rating," Sarah Karush, Detroit Free Press, September 19, 2006, at http://www.freep.com/apps/pbcs.dll/article?AID=/20060919/NEWS99/60919023/1014, "2 Agencies Downgrade Ford Credit Ratings," the Associated Press, September 19, 2006, available at Yahoo! News, "Moody's, S and P Cut Ford's Rating Deeper into Junk," Agence France Presse, September 19, 2006, available at Yahoo! News, "Ford Lowered by S&P, Moody's," The Wall Street Journal, September 20, 2006, p. C5
Sources for S&P's outlook on Ford debt: "Moody's, S and P Cut Ford's Rating Deeper into Junk," Agence France Presse, September 19, 2006, available at Yahoo! News
Sources for Fitch's post-bankruptcy recovery estimate: "Fitch Downgrades Ford & Ford Credit's IDR to 'B'; Outlook Remains Negative," Business Wire, August 18, 2006, available at http://home.businesswire.com or via Google search, "Recovery Ratings," at http://www.fitchratings.com/corporate/recovery_ratings.cfm
Source for default insurance premiums: "S&P Puts Ford a Bit Deeper into Junk," Serena NG, The Wall Street Journal, p. C5, June 29, 2006
Source for GM's buyout offer: "Automaker's Downsizing Aims to Ensure Survival," Bill Vlasic and Brett Clanton, Detroit News, March 23, 2006, at http://www.detnews.com/apps/pbcs.dll/article?AID=/20060323/AUTO01/603230402/1148
Source for buyout acceptance: "GM Says 35,000 Workers Accept Buyouts," Poornima Gupta and Kevin Krolicki, Reuters, June 26, 2006, available at Yahoo! News
Source for Delphi losses: "Delphi's Troubles Multiply," Jason Roberson, Detroit Free Press, June 1, 2006, at http://www.freep.com/apps/pbcs.dll/article?AID=/20060601/BUSINESS01/606010374/1014
Sources for Strike Authorization: "UAW OKs Strike at Delphi," Brent Clanton and Bill Vlasic, Detroit News, May 17, 2006, at http://www.detnews.com/apps/pbcs.dll/article?AID=/20060517/AUTO01/605170337/1148, "Delphi Workers Approve Strike," Jason Roberson, Detroit Free Press, May 17, 2006, at http://www.freep.com/apps/pbcs.dll/article?AID=/20060517/BUSINESS01/605170346/1014, and "UAW Authorizes Strike Against Delphi," Dee-Ann Durbin, the Associated Press, May 16, 2006, available at Yahoo! News
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