- The Washington Times - Tuesday, May 24, 2005

NEW YORK (AP) — Fitch Ratings reduced its credit rating for General Motors Corp. to junk status yesterday, citing the profit-sapping impact of sales declines and industry price competition.

GM shares and bonds fell on the news, which means the company likely will have to pay more to borrow and complicate its attempt to cut costs.

The world’s largest automaker said it was disappointed.

“Clearly, GM has many challenges in North America, but the company is moving aggressively to address the challenges,” GM spokeswoman Gina Proia said.

Miss Proia added that GM and its finance arm, General Motors Acceptance Corp. (GMAC), “have adequate cash and liquidity to fund their business for the foreseeable future.”

Fitch said GM had nearly $20 billion in cash at the end of the first quarter, and GMAC had another $18.5 billion.

GM’s consolidated debt as of March 31 was $291.8 billion, Standard & Poor’s Ratings Services said earlier this month. S&P; downgraded both GM and U.S. rival Ford Motor Co. to junk, or non-investment-grade status, nearly three weeks ago. Both companies have been beset by soaring health care costs, higher gasoline prices and loss of market share to Asian competitors.

Fitch cut by one level the senior unsecured debt ratings of GM and GMAC to BB+ from BBB-. Fitch said the move reflects a decline in GM’s North American sales of midsize and large sport utility vehicle products and increasing competition in the large pickup market.

The ratings company also cited declining profitability and a lack of tangible progress in attacking manufacturing and legacy costs, which will result in negative cash flow through at least 2006. Its ratings outlook for GM remains negative.

B. Craig Hutson, a senior bond analyst at research firm Gimme Credit, said Fitch’s action wasn’t surprising, given GM’s troubles and its inability to get cost-cutting concessions from the United Auto Workers (UAW) union.

“Fitch sent a clear signal to GM that they have to make meaningful progress with the UAW in reducing their structural costs,” Mr. Hutson said. “In light of the pressures and challenges, the downgrade is probably warranted.”

Besides raising borrowing costs for GM, Fitch’s decision effectively robs the automaker of its place in the widely watched Lehman Brothers Index for investment-grade credit.

Lehman Brothers plans in July to eject from the index those companies whose average ratings at Fitch, S&P; and Moody’s Investors Service are junk. The exclusion would bar many institutional investors from holding the company’s debt.

Mr. Hutson said the anticipated move by Lehman Brothers also shouldn’t take investors by surprise.

“A lot of people have positioned themselves portfolio-wise in anticipation of this happening,” Mr. Hutson said. “There may be accounts that will be forced sellers because of this action, because of falling out officially, but it’s unclear how many.”

GM shares fell 90 cents, or 2.8 percent, to close at $31.69 on the New York Stock Exchange yesterday. Debt of the company also fell. GM’s 8.375 percent bonds maturing in 2033 — the $3 billion issue is considered a benchmark of the automaker’s long-term debt — fell to 71 cents on the dollar in afternoon trading from 73.5 cents before the move by Fitch, according to bond-pricing service MarketAxess.

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