Gm And Ford Downgraded

[polycarp]

http://www.economist.com/agenda/display ... 7&fsrc=nwl

A series of bad news for General Motors and Ford was capped this week with the downgrading to junk status of their bonds by a leading credit-rating agency. With no end in sight to their problems, what will become of the two giant Detroit carmakers?

LIKE a car mechanic imparting the bad news with a tut, a shake of the head and a sharp intake of breath, Standard & Poor’s, a credit-rating agency, this week delivered its verdict on the roadworthiness of General Motors and Ford, downgrading both carmakers’ bonds to junk status. The move will compound the problems of the two companies, which were already looking seriously wobbly.

S&P’s decision to cut by two notches its rating for GM and its finance subsidiary, and by one notch those of Ford and its finance arm, will affect a vast pool of outstanding debt worth over $450 billion. While markets had expected the move, its timing and (in GM’s case) severity were less well anticipated”hence the shivers it sent through the credit markets. But it comes after a pile of bad news for both car companies which could yet see Moody’s and Fitch, the other big rating agencies, take a similar line. At present both rate the firms’ debt at just above junk.

Most of the problems faced by GM and Ford stem from an obvious but crucial weakness: an inability to sell enough cars. In the North American market, vital to the health of both firms, overall vehicle sales are growing. But the two Detroit giants have seen both their sales and their market share contract. In April, Americans bought over 1.5m light vehicles, an increase of 1.8% compared with a year earlier; at the same time GM’s sales crashed by 7.7%, and Ford’s by nearly 5%; and GM’s market share fell from 28% to 25.4%, and Ford’s from 19.8% to 18.4%. Also in April, GM revealed the consequences of its slump: a loss of $1.1 billion for the quarter to the end of March. Ford managed to turn a net profit of $1.2 billion, but that was 38% less than it made a year ago.

The competition has come mainly from the Japanese”and to a lesser extent from a resurgent DaimlerChrysler. Honda, Nissan and Toyota bumped up their combined North American market share from 24.8% to 29.1% in the year to April, selling some 438,000 light vehicles. And they are hitting GM and Ford where it hurts most.

The revival of the Detroit firms after the slump that followed the September 11th 2001 terrorist attacks was led by sales of profitable sport-utility vehicles (SUVs). Now, GM and Ford are finding fewer takers for these petrol-guzzling beasts. This is partly because of the high price of oil. But the main reason is that Ford’s and GM’s tired product lines are being overtaken by more desirable models from Japan.

Worse still, the Japanese are also making inroads into the market for pick-up trucks, a vehicle as ubiquitous in America’s heartland as the buffalo once was. And though Ford and GM have new product lines on the way over the next year or so, their competitors are revving up their new offerings now. The Japanese are also gaining in the market for small cars, while luxury-car buyers in America now generally choose models from Europe and Asia.

Ford and GM have responded to these problems with lay-offs, factory closures and the odd rearguard deal. GM has cut its losses in Europe by buying its way out of a “put” option that would have forced it to take on Fiat Auto, an ailing Italian car company; and by cutting back at Opel, its European carmaking arm. Likewise, Ford has closed five American factories in the past three years, cut production every quarter for almost as long, and is trying to reduce its stocks of unsold cars.

GM also revamped its top management structure recently by appointing a senior executive to tackle two of the worst problems it faces: employment and “legacy” costs. On the first of these, the Japanese carmakers have a clear advantage over their American counterparts. Even though many of their vehicles are made in America, they do not have to pay the extras demanded by unionised workforces.

GM and, to a lesser extent, Ford must also fund a vast and ever-growing pool of pensions for former employees and health-care bills for current ones. Ford’s unfunded pension liability stood at $12.3 billion at the end of 2004. In GM’s case, legacy costs accounted for 2.3% of revenues in 1999. This will grow to 5% this year, according to CreditSights, a research firm. GM says that it could save billions if only its blue-collar workers would agree to the reduced health-care benefits that the firm’s white-collar staff recently accepted.

Perhaps a deal with the unions over these costs is not far away. Indeed, it may have been this prospect that nudged Kirk Kerkorian, a wily old American investor, to announce, the day before the downgrade from S&P, that he intended to more than double his stake in GM to 8.8%, at a cost of around $870m. Other shareholders will no doubt be hoping that he uses his increased stake to force management into making big strategic changes.

But the carmaking operations are not the only worry. GM’s finance arm, GMAC, made $2.9 billion of the group’s total net profits of $3.6 billion in 2004. Ford’s profits of $3.5 billion were mainly attributable to Ford Credit (the carmaking operations made a loss of $155m). But as interest rates go up in America (the Federal Reserve raised rates by another quarter point this week and is set to continue bumping up the cost of borrowing) consumers are becoming wary not only of splashing out on new cars but, especially, of doing so on credit. The result is a double whammy: fewer customers for both GMAC and the vehicle salesmen.

Both GM and Ford have sizeable cash piles ($26 billion in GM’s case) and credit lines available, so the extra cost of financing resulting from the credit downgrades should not hurt too much in the immediate future. But it remains to be seen how long both firms can remain solvent if their core operations continue to bleed money and their legacy costs continue to grow. Bankruptcy no longer seems far-fetched. Indeed, the opportunity to emerge from Chapter 11 as smaller, leaner operations, stripped of some burdensome liabilities and better equipped to move back into the fast lane of carmaking, may be starting to look like an appealing option.

[john8pies]

I`ve had Fords and they`re okay, but for reliability, good petrol (`gas` in America) consumption, and all the extras, Japanese cars seem to be the best. This could explain the above story!

[spot]

john8pies wrote: I`ve had Fords and they`re okay, but for reliability, good petrol (`gas` in America) consumption, and all the extras, Japanese cars seem to be the best. This could explain the above story!I hate to buy anything not made locally, John, though obviously there some occasions where I have no option. If you spend on local products, locals have money to spend on what you produce, and it goes round and everyone locally has more.

From when I learned to drive, until I stopped owning cars, I had an Austin Princess, a Humber Sceptre, several appalling Vauxhalls which I always regarded as death traps, and finally a Rover.

Without wanting to become embroiled in controversy, I'll tell you why you hear the death-rattle in Detroit's throat. Some companies have recognised that they can make more shareholder profit by seeking cheap components, made in cheap labor pools, and by retaining only a tight core of enabling office staff with no manufacturing capacity of their own. If they undercut local manufacturers, you end up with a dead industrial base, nobody except the tight core of enabling office staff earning good wages, and a whole stack of unemployed manual laborers deprived of their factories. Personally, I'd prefer local responsibility on the part of buyers, and an adjusted tax regime that penalizes the retention of wealth by a small minority of the population at the expense of the masses.

That's my view, it's relevant to Detroit unemployment, it's not trolling, by all means ignore my view if you think it is. (There are, actually, two words, trolling and trawling, which people here have conflated into one. I didn't look for a topic to divert in order to stir up trouble, trawling, and I don't post controversy for the sake of it, trolling).

[Philadelphia Eagle]

I think we need to be a little careful when we talk of junk bond status.

The word 'junk' when applied to a financial bond does not mean 'worthless'. It means 'higher risk'.

Also, the down grading of a company's bond ( bond ratings are moved up and down regularly) is done by a credit rating agency and not by the market itself and so does not reflect the actual rate of interest which that Company will have to pay when it borrows money to finance its Working Capital..

Many retirees hold 'high yield' mutual fund bonds as a suppliment to regular pension income. These bonds are dominated by companies whose bond status is 'junk' or, more accurately 'high yield'. Some leading financial houses have been offering high yield bonds for many years and have an unblemished record of dividend payout. The attraction, of course, is the higher dividend or interest rates they pay to investors.

So it may be that, in the future, Ford and GM will have to pay an increased interest rate when they 'roll over' their borrowings but not necessarily.

The banks and other financial institutions who actually lend the money will agree a rate with the borrower - not the credit rating agency.

[gmc]

I would take standard and Poors with a pinch of salt. this is the organisation that was giving four stars to equitable life shortly before they were told to close

[spot]

Philadelphia Eagle wrote: So it may be that, in the future, Ford and GM will have to pay an increased interest rate when they 'roll over' their borrowings but not necessarily.They'll continue to fund borrowing (if you want to call internal transfers borrowings) from their war chest for some while to come. It would be terribly embarrassing to either of them to have to ask the market for loans!

Ford Motor Company and Subsidiaries condensed consolidated statement of cash flows for the Period Ended March 31, 2005 Cash and cash equivalents at January 2005 $23,510 millions (or a Third of a Gates).

General Motors 2004 Annual Report consolidated statement of cash flows for the Period Ended December 31, 2004 Cash and cash equivalents at end of 2004 $35,593 millions (or Half a Gates).

[spot]

Inspired by this thread, I've just watched "Roger and me". Talk about cause and effect... General Motors has cash and cash equivalents of $35 Billion, and Flint MI responds by building a new jailhouse? Does civic pride mean nothing any longer? Is greed the be-all and end-all of capitalism?

An elder Cherokee Native American was teaching his grandchildren about life. He said to them, "A fight is going on inside me...It is a terrible fight, and it is between two wolves. One wolf represents fear, anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, pride and superiority. The other wolf stands for joy, peace, love, hope, sharing, serenity, humility, kindness, benevolence, friendship, empathy, generosity, truth, compassion, and faith. This same fight is going on inside of you and every other person too."

They thought about it for a minute and then one child asked his grandfather, "Which wolf will win?" The old Cherokee simply replied..."The one I feed."



I think this evening I might watch The Corporation.