So Standard & Poor’s finally bowed to the inevitable today and cut its credit ratings for General Motors Corp. and Ford Motor Co. to junk. For non-financially-inclined dopers, this is a bad thing because the companies will have to pay more to borrow money in the future, and many investors are barred from owning bonds that are rated junk, or below investment grade.
A lot of people have been expecting this since March 16, when GM forecast a first-quarter loss of $1.50 a share, cut its estimate for annual earnings by more than half and restated its profit in 2004’s fourth quarter as a loss. The quarterly loss came in last month at $1.1 billion, and GM said it can’t forecast earnings until it resolves what the company called a “health-care crisis.” Ford last month reported a 38 percent drop in first-quarter profit and said it would reduce North American production further as sales drop.
What’s happening to the companies is no mystery: at the same time that they’re losing market share, GM and Ford are being eaten alive by costs for health care for current employees and retirees. Asian carmakers had a record 37.5% of U.S. sales of new cars and trucks in April, while sales dropped 3.9% at GM and 1.5% at Ford. GM has said it expects to pay $5.6 billion this year for employee health care.
GM had about $300 billion in notes, bonds, loans and asset-backed securities as of Dec. 31 and is the biggest company ever cut to junk, according to Bloomberg. S&P cut GM’s long-term credit rating to BB from BBB- and lowered Ford to BB+ from BBB-.