A federal bailout of $17.4 billion was not enough to keep Standard & Poor’s Corp. from downgrading the credit ratings of General Motors Corp. and Chrysler LLC today on continued concerns both automakers will undertake distressed debt exchanges and fears bankruptcy will remain a risk in 2009.
“We’ve been pretty clear all along that this government money we view as buying these companies time, but not solving their problems,” said Robert Schultz, the S & P credit analyst behind both reports, in an interview. “It’s not going to change their fundamental issues.”
Standard & Poor’s lowered its ratings on the unsecured debt of GM and General Motors of Canada Ltd. to C from CC, and revised its recovery rating on GM’s debt to 6 - which means the amount lenders can expect to recover is negligible (0 to 10 percent) in the event of a payment default. The actions reflect GM’s planned receipt of up to $13.4 billion from the U.S. government and another $2.5 billion from the Canadian and Ontario governments, as well as loans potentially from Germany and Sweden, which would diminish the value of equity held by unsecured creditors at home and in foreign subsidiaries, the agency said in a report.
It is the second downgrade for GM this month. Its corporate rating was lowered to CC on Dec. 4.
And CC is the corporate credit rating that Standard & Poor’s gave Chrysler LLC today, while also lowered the ratings on the automaker’s senior secured debt and listing the outlook as negative.
A rating of CC is given when a company is expected to undertake a distressed exchange of debt, perhaps for equity, said Schultz.
GM outlined its intent to exchange debt for equity as part of the restructuring plan it submitted to Congress.
In the case of Chrysler, Shultz said the automaker hasn’t actually launched an exchange, but he expects it will happen. “They seem to be making similar pronouncements given that they seek concessions from lenders,” he said.
On Friday, Chrysler said it would meet the government’s conditions for receiving a $4 billion emergency loan and achieve viability in part by pursuing concessions from its secured lenders.
“We interpret this to mean that Chrysler will offer to exchange some or all of its secured debt for equity or new debt at a steep discount to face value. Given Chrysler’s weak liquidity, we consider such an offer to be a distressed exchange and, as such, tantamount to a default,” Standard & Poor’s said in its report.
Ford Motor Co. has not indicated it intends to impair its debt holders, Schultz said.
The downgrades “indicate the direction these companies are being driven in by market conditions in terms of having to deal with their capital structure, with the UAW, with their dealers,” said Schlutz. “It’s more of a reflection of where these companies are.”
The government loans are designed to prevent an immediate bankruptcy by GM or Chrysler this year. But it remains a high risk in 2009 because of the weak outlook for the U.S. economy and new car and truck sales, Schultz said.
In a letter to employees today, Chrysler CEO Robert Nardelli said the “difficult but necessary actions” taken this year “have positioned Chrysler to begin 2009 as a leaner, more efficient and focused organization characterized by fewer layers of management with broader spans of control. Chrysler has slashed more than 5,000 jobs this year, closed plants and reduced output to lower costs
“We have a realistic and achievable plan to turn Chrysler around and return the company to profitability,” Nardelli said. “With the government bridge loan forthcoming, we’ll have the financial backing to implement that plan. In the weeks ahead we will continue to work with all of our stakeholders to achieve the shared sacrifice that we need in order to achieve long-term viability.