Ford And GM Credit Ratings Land in the Junk PileIn May, Standard & Poor's reduced the credit rating of Ford and GM to "junk" status for the first time in the history of these Big Three automakers.
S&P doubts the companies will generate adequate cash profits to consistently pay down their debts and to fold back into their businesses. Therefore, the agency downgraded the company's bonds to below investment grade. Bonds are devices through which investors lend money to a company with interest-as opposed to stocks, which allow investors to buy a stake in a company. One impact that this downgrade will have is that Ford and GM will find it more difficult to borrow money. Also, institutional investors can't buy junk bonds because they are too risky, and some of them will be forced to pull their money from these carmakers. Those investors who can buy them will demand a greater return on their investment.
At the time of this writing, the other two major credit rating agencies, Fitch Ratings and Moody's Investors, have not downgraded Ford and GM to junk status. Why did S&P make its decision? Rising health care costs and a falling market share. Health care adds around $1,500 to the price of vehicles coming out of Detroit-costs that Asian carmakers don't have to contend with. Both automakers had become very dependent on profitable truck and SUV markets. But SUV sales have been dropping rapidly, due in part to rising gas prices. Overall, the U.S. market share for GM was 25.1 percent in April, down 2.6 percent from a year before, while Ford's numbers dropped 1.3 percent to 17.5.