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S&P Smiles on Ford and GM

September 29, 2011
4 min to read


General Motors Co. and Ford Motor Co. are on the verge of winning back investment-grade credit ratings, nearly seven years after financial meltdowns turned their bonds into "junk."


On Thursday, Standard & Poor's Ratings Services lifted GM's rating by two notches, to double-B-plus, just one step below investment grade. S&P cited two years of solid financial performance by GM and the benefits of its new, four-year labor deal with the United Auto Workers, reported The Wall Street Journal.

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The ratings firm said Ford is in for a one-notch bump, also to double-B-plus, once it concludes its own deal with the union, expected as soon as this week.


"This is another external acknowledgment of the progress we are making. We laid out a strategy, and we executed that strategy," GM's finance chief, Daniel Ammann, said in an interview.


Last week, Moody's Investors Service said it is also eyeing GM for a possible upgrade.


The move by S&P represents a redemption for GM, which for generations was known as a reliable investment bet. But it suffered years of decline and was forced into bankruptcy court amid recession and the financial crisis in 2009.


A return to investment-grade status could mean lower interest rates on borrowings by GM and Ford, and could clear the way for some institutional investors to buy their debt.

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"I've started to dust off my old models to prepare for their triumphant return to high grade," said Brian Beargie, director of research at Legal & General Investment Management America, which manages a $20 billion portfolio of mostly investment-grade bonds.


GM and Ford saw their credit ratings cut to non-investment grade, or "junk," status in 2005. At the time, the companies shared many of the same problems: sinking U.S. market share, too many underused factories, crushing retiree health costs an over-dependence on profit-eroding incentives. But they have taken different roads to recovery.


GM, aided by a $50 billion U.S. government bailout and bankruptcy proceedings, cast off billions of dollars in debt, slashed its work force and shed unprofitable brands and models. After losing more than $90 billion between 2004 and 2009, the auto maker has become solidly profitable, earning $4.7 billion last year. It has around $5 billion in debt, but faces a shortfall in its U.S. and global pension programs.


Beyond its balance sheet, GM sales are up, even though it has eliminated four of its eight brands, and profit per vehicle has been on the rise as the company commands higher prices.


Ford borrowed $23.5 billion in 2006 and was able to turn itself around without a government bailout or a bankruptcy filing. Under Chief Executive Alan Mulally, Ford closed plants, sold off niche brands like Land Rover and Jaguar and put most of its resources into its Ford division.

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The company has been working to pare its debt. Ford recently paid down an additional $1.8 billion of long-term debt and now has just $12.2 billion in automotive debt, down from $33.6 billion at the end of 2009.


A Ford spokesman said the company is making progress. "Ultimately, the credit-rating agencies determine when we return to investment grade. Our job is to stay focused on making progress on our plan," said Ford spokesman Todd Nissen.


S&P analyst Robert Schulz said GM and Ford, while taking different paths, should hold similar appeal to investors. "There are more similarities than differences," he said. Ford carries a far higher debt burden than GM, for instance, but GM is weighed down by underfunded pension obligations. GM has an advantage over Ford because of the strength of its global operations, while Ford has the edge in the U.S., Mr. Schulz said.


A ratings boosts doesn't mean the auto makers are in the clear. To return to investment grade, S&P said, the companies must resist the urge to return to big discounts to juice sales amid a depressed auto market and avoid overproducing vehicles.


"The whole idea all along has been to set the company up to deal with any environment we face," said GM's Mr. Ammann. "We are prepared."

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