DETROIT Moody's Investors Service on Monday cut its rating on General Motors Corp. deeper into junk territory on the expectation that the auto maker's liquidity will continue to erode into 2009 despite any benefit from the U.S. government's $25-billion (U.S.) low-cost loan program.
The ratings agency also cut Chrysler LLC for similar reasons and said it may cut Ford Motor Co., depending on a review of the auto manufacturer's ability to preserve liquidity amid eroding demand and tight credit conditions.
GM's ratings reflect the risk that “despite all of GM's business restructuring and liquidity-raising efforts to date, the magnitude of cash outflows due to ongoing operating losses, debt repayments and other uses will consume the company's available cash during 2009,” said Bruce Clark, senior vice-president with Moody's.
Moody's cut GM ratings one notch to “Caa2,” eight levels below investment grade. The outlook for the No. 1 U.S. auto maker is “negative,” indicating another downgrade could be in the cards in the next 12 to 18 months.
The downgrade also reflects the expectation that the erosion in the U.S. automotive sector will further pressure GM's liquidity.
Moody's also cut Chrysler one notch to “Caa2,” and said it may cut the rating again, reflecting increased pressure on the company's liquidity and decline in auto demand.
Ford is on review for downgrade from “B3,” six steps below investment grade.
“In the face of weakening business conditions and rapidly depleting liquidity, GM's overall credit quality is eroding more rapidly than previously expected,” the ratings agency said, adding that GM could face a cash shortfall by mid-2009 in the absence of any significant external financial or business assistance.
Moody's also said it may cut its ratings on finance unit GMAC from “B3,” six steps below investment grade.
“Declines in industry auto sales, shifts in consumer sentiment away from sport utility vehicles and trucks, and extended economic weakness are likely to cause GMAC's consumer and dealer defaults to rise and recoveries from repossessed vehicle sales to decline,” Moody's said.
“The net effect of these factors could be credit quality measures that exceed normal cyclical bounds, increasing the pressure on GMAC's profitability.”
GM – which is in merger talks to acquire Chrysler and shore up its own cash position – had about $21-billion in cash at the end of the second quarter but was burning through more than $1-billion a month.
The auto maker has counted on its ability to raise up to $5-billion through a combination of borrowing and asset sales to make it through 2009, but the recent churn in credit markets has threatened that goal.
Moody's said capital market conditions severely limit the likelihood that GM will be able to sell assets or raise new capital.