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GM and ford bonds shifted to junk { May 6 2005 } Original Source Link: (May no longer be active)
http://www.newsday.com/business/ny-bzjunk4246909may06,0,3802114.story?coll=ny-business-headlineshttp://www.newsday.com/business/ny-bzjunk4246909may06,0,3802114.story?coll=ny-business-headlines
GM, Ford shift to 'junk'
S&P downgrades bonds of two giant carmakers, cites 'competitive disadvantages'
BY SUSAN HARRIGAN
STAFF WRITER
May 6, 2005
In a move that shocked the markets, Standard & Poor's cut the credit ratings of General Motors Corp. and Ford Motor Co. to "junk bond" status yesterday.
The companies' stock prices fell as investors worried that the automakers face higher borrowing costs, and bond markets were roiled as owners piled for the exits because of the securities' increased risk. The rating doesn't mean that the companies are going bankrupt anytime soon, but does warn that there's a long-term chance of default.
General Motors and Ford are the two biggest U.S. automakers and are two of the three largest U.S. issuers of corporate debt, with a total of more than $450 million in debt between them. At the news of the credit downgrade, which came shortly before 1 p.m., the Dow Jones industrial average fell more than 80 points in half an hour, and bond traders scrambled to answer calls from worried investors.
"It was absolutely insane around lunchtime," said Pete Hastings, vice president of fixed income at Morgan Keegan Inc., a Memphis, Tenn.-based investment bank. He said the downgrade created the highest new inflow into the high-yield market "in recent history."
Hastings said calls poured in from all sorts of investors - individuals and institutional holders such as banks, insurance companies and pension funds. Many investors have strict policies governing the amount of risk they will tolerate in their portfolios, and some pension funds and high-quality bond funds are prohibited from owning securities that are below investment grade.
Mirko Mikelic, a portfolio manager who oversees $14 billion worth of bonds at Fifth Third Asset Management, a money-management concern in Grand Rapids, Mich., said the downgrade "has obviously been coming down the path" for quite a while because of increasing problems at both companies, but that "the timing was just a bit surprising." Many investors didn't expect the downgrade until summer, he said.
In his report downgrading the two companies, Standard & Poor's analyst Scott Sprinzen said Ford and GM might not be able to overcome "competitive disadvantages" in their industry, and specifically mentioned the declining sales of sport utility vehicles at both companies.
GM said it was "disappointed" with S&P's decision, and Ford said in a statement that "we disagree with S&P's action today."
The Dow recovered somewhat to close down 0.4 percent, or 44.26 points, its first fallback in five days. GM was the worst performer in the venerable index, as its shares fell 5.9 percent, or $1.94, to $30.86.
Ironically, GM shares soared 18 percent Wednesday on news that investor Kirk Kerkorian would offer about $168 million, or $31 a share, for about 5 percent of the automaker's outstanding shares.
Ford's stock lost 4.5 percent, or 46 cents per share, closing at $9.70.
The sales of the automakers' bonds caused their prices to tumble and their yields, which move in an opposite direction from price, to rise. Bloomberg reported that GM's 8.375 percent bonds maturing in 2033 fell 4 cents on the dollar to 75 cents, and its yield rose to 11.3 percent. Ford's 7 percent notes due in 2013 fell to 88 cents on the dollar from 92 cents, and the yield rose to 9.1 percent.
Copyright 2005 Newsday Inc.
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