Thursday, May 05, 2005

GM Debt Reduced To Junk

GM's debt was reduced to "junk" this morning. "Standard & Poor's cut General Motors Corp.'s debt ratings to junk status on Thursday in a move that will reduce the automaker's avenues for raising funds as it struggles with global competition and rising healthcare costs."

"The rating outlook is negative. S&P said the move reflects its conclusion that management's strategies may be ineffective in addressing GM's competitive disadvantages."

The market rallied yesterday on the basis of this move, which doesn't look so smart now. "The bid by Kirk Kerkorian's Tracinda Corp. to increase its ownership stake in GM represents an additional uncertainty, S&P said, but said this was not a factor at all in the current rating action."

13 Comments:

At 10:07 AM, Blogger John Law said...

as GM goes so goes the nation...

 
At 10:09 AM, Anonymous Anonymous said...

Ford too...

 
At 10:09 AM, Anonymous pb said...

I was just watching the Dow and it fell off a cliff... this had been expected, but not so soon, I think. What will be interesting now is what happens as folks who can't hold this stuff by law (pensions, for example) jockey to dump it. Thoughts on the effect this will have on the bond market? Should drive treasury rates down, I imagine, as a "flight to quality" ensues.

 
At 10:25 AM, Anonymous cartalk said...

As a company, GM is not as important as it used to be. But in terms of the corporate bond market, it's still the biggest player by a wide margin (no pun intended). While this downgrade was well telegraphed, we will still see lots of volatility in stocks and bonds until all the players have squared their positions.

The most bullish thing that could happen is for GM to file for bankruptcy allowing it to break its pension and labor obligations. The common stock would go to zero, but the bonds would be saved---and that's more important.

Obviously, a bankrupt GM wouldn't be a positive in the short-term (6-12 months). But it would remove the uncertainty hanging over the bond and stock market. Without the overhang of their impossible labor agreements and their pension and health liabilities, they could actually run a pretty good car biz with new management.

I think the bigger problem is their GMAC division. It has been the only profitable part of the company but it's days are numbered. If they could sell it off and right-size the car biz via bankruptcy, the company could do well a few years hence.

But there would be mucho pain in the interim...

 
At 10:32 AM, Anonymous Anonymous said...

How very sad that the biggest losers in all this could be the long term GM employees who could (will) lose what they thought was their security for their retirement years.

 
At 10:47 AM, Anonymous powertothepeople said...

***
---How very sad that the biggest losers in all this could be the long term GM employees who could (will) lose what they thought was their security for their retirement years.---

Sad, yes. But to be expected. This has happened over and over and over---the airlines, the steel companies, Enron, etc., etc. The financial laws in the country are bought and paid for by corporations---witness the new bankruptcy bill or the "Credit Card Company Profit Protection Act".

In the case of corporate bankruptcy or malfeasance, most execs do very well both financially and professionally. The workers get the shaft. But this is the system we have. The best thing to do, short of a revolution, is to never ever entrust your financial future to your employer. Assume you will never see a dime of Social Security or pension benefits. That way, if you get lucky and receive some $$$, you'll consider it a bonus.

 
At 10:58 AM, Blogger Ben Jones said...

PB, Cartalk,
I have read that GM's bonds were being discounted ahead of this, but the implications for the future market are bad. Who is going to come up with GMAC's share of the mortgage business?

GM will probably chose bankruptcy. Have you seen how much they think they can get for GMAC? One billion dollars! For a firm writing hundreds of $billions of loans a year.

 
At 11:30 AM, Anonymous cartalk said...

---I have read that GM's bonds were being discounted ahead of this, but the implications for the future market are bad.----

The best guy to read on this is Brian Reynolds of MS Howells (a bond shop). He comments frequently on the Minyanville.com site.

His take is that the real key to stock market direction is to take a look at sentiment in the corporate bond arena. The big money right now is in bond converts (convertible to stock at a certain price) and in M&A activity. If the corp bond market gets hit, it kicks the legs out from under the stock market.

So while these downgrades are not a surprise, he feels that until the dust settles, the stock market will be very choppy and there is potential for a major move up or down depending on how the GM/Ford situation shakes out. The reason GM/Ford are so important is that they have so much debt. In fact, their debt is three times larger the the entire rest of the corp debt market combined. So you can see why this is crucial.

How this will effect housing is not clear. Personally I think the housing market is on fumes one way or t'other. If mortgage rates stay low (or even go lower), it could provide support to housing via a softer decline. But I don't think at this point rates matter that much, unless they go way up. In that case, housing is in big trouble. But I don't see that happening this year.

 
At 12:05 PM, Blogger John Law said...

so can we downgrade the US economy to junk status too?

 
At 12:23 PM, Anonymous Anonymous said...

"How very sad that the biggest losers in all this could be the long term GM employees who could (will) lose what they thought was their security for their retirement years."

Only foolish employees would believe that. GM's market share has dropped by half over the last 30 years. Toyota is now tied for #1 in the world. GM's management has been endlessly warning about the crippling effects union thinking from a dead era.

GM's quality has improved a bit, but they are saddled with an absurd percentage of redundant products. They can't even get rid of brands without lawsuits (which are still going on from killing Oldsmobile). By all logic Buick and Pontiac should have been killed too (shifting buyers to Cadillac and Chevy).

The union employees got far better compensation than could be reasonably expected in an internationally competitive marketplace--if GM dies unions have at least 1/2 of the responsibility.

I won't mourn GM because they made their bed by selling garbage for far too long. I won't mourn the pain of unrealistic employees. Hopefully something better can rise from the ashes. Until then I'll eagerly buy Japanese cars--as made in the USA.

 
At 12:45 PM, Anonymous Anonymous said...

GM downgraded their cars to junk in the 80's. I worked at EDS in the 90's and they openly admitted that if they didn't change the way they did business they'd be gone in 10 years. They did make some changes and their products have improved some, but it doesn't look like it's good enough.

 
At 12:51 PM, Anonymous Anonymous said...

They can't say Perot didn't warn them.

 
At 12:52 PM, Blogger John Law said...

GM makes cars? they look more like a bank to me!!!

nobody on TV pays attention to the lending side, probably because it makes money. I will be very interested to see how it weathers this debt and housing bubble.

 

Post a Comment

<< Home