General Motors' Pause on Way to Junk Is Troubling

Last October Standard and Poor's downgraded GM's credit rating to BBB-.

"Many corporate-bond investors measure their performance against indexes, with those compiled by Lehman Brothers Holdings Inc. among the most used. A downgrade to junk by either S&P or Moody's Investors Service would currently prompt Lehman to kick General Motors out of its investment-grade dollar-bond benchmark, where it accounts for almost 3 percent of the $1.7 trillion index. Bondholders who track that index would probably dump their General Motors bonds. "

"Companies that drop out of investment grade are twice as likely to default as borrowers whose ratings start at junk, with the greatest risk of nonpayment coming in the first three to four years following a drop, according to a study of 24 years of data published by S&P earlier this month."

"Equity investors have wiped almost 30 percent off the market value of General Motors this year; debt investors already treat the company's bonds like junk. Hesitating on cutting the credit rating of General Motors is just delaying the inevitable."

According to the article, GM doesn't keep its credit ratings (good or bad) very long -- however, if it keeps its current status longer than July then it'll have a much easier time financially.



GM Rating Cut Inevitable

"Nevertheless a new report from Merrill Lynch suggested that ratings on GM's outstanding debt and that of its finance subsidiary GMAC, estimated at more than $200 billion, will drop to junk status later this year.

The downgrade of a combined $200 billion in unsecured debt to junk territory would be unprecedented in capital markets, and investors should "expect a bumpy ride," Merrill Lynch said in a report issued last week."

"Standard & Poor's and Fitch Ratings now rate GM debt one notch above junk, while Moody's Investors Service rates the company one grade higher. Both S&P and Fitch have warned they could cut GM to junk at any time after GM disclosed it expected to lose more than $850 million in the first quarter and its profits would drop 80 percent this year."

"Merrill Lynch said successful new product launches could help GM's financial picture, but perhaps not enough to avert what looks like an inevitable cut in GM's rating. The reduction could come in three to six months, the report said."



General Motors Debt Costs Surge as GE Pulls Support

"GE plans to cut a $2 billion credit line in June that paid auto parts suppliers faster. The agreement, which was to expire at the end of the year, contained a so-called ``trigger'' allowing GE to cancel when Standard & Poor's placed GM's BBB- credit rating on negative outlook, indicating that the automaker may be cut to speculative-grade, or junk, status.

``The fact that a major finance company like GE is stepping away from the company is a symptom of greater problems,'' said Joseph Robison, chief credit officer at National City Bank in Cleveland, where he helps manage about $6.5 billion in fixed- income. ``The move itself is not a sign of an impending liquidity crisis.''

Under the agreement, GM's parts suppliers were paid within a few business days, rather than the 45 days GM typically takes to pay them. GE spokesman David Frail declined comment. A spokesman at GE Commercial Credit, Stephen White, did not immediately return telephone messages. "

The GE program wasn't for the largest of the suppliers, Delphi Corporation -- rather it was for the smaller suppliers. GMAC is going to step in and try to replace GE.

"GM bonds are trading at levels unseen for more than two years, even as overall corporate-bond spreads narrowed from a high of 2.67 percentage points on Oct. 10, 2002, to 86 basis points yesterday, according to Merrill Lynch data. "

"GM's 2011 bond is trading at about the same levels as securities of money-losing companies with junk credit ratings, such as Delta Air Lines Inc.'s 7.11 percent note and Tenet Healthcare Corp.'s 6.375 percent note, according to Merrill Lynch. Both mature in 2011. "



so the question is, can GM survive junk bond status? what might/will happen if/when this occurs?

I'm glad I'm not in Wagner's shoes right now.