In yet another sign of the mounting woes facing the U.S. automobile industry, Standard & Poor’s slashed the credit ratings of two of the nation’s largest car dealer chains Wednesday, citing growing concern about the impact of weaker car and truck sales.
Standard & Poor’s lowered its corporate credit rating on Bloomfield Hills-based Penske Automotive Group Inc. to “B+” from “BB-” and cut its rating for Fort Lauderdale-based AutoNation Inc. to “BB+” from “BBB-,” setting both companies’ outlook to “negative.”
“The downgrade reflects the companies’ weak credit measures heading into 2009 — a year in which we believe light vehicle sales for the North American auto retailers will reach multi-decade lows,” said Standard & Poor’s credit analyst Nancy Messer.
She also expressed concern that the weak economy will cause customers to put off vehicle maintenance and parts purchases, both of which are major sources of dealer income.
“As a result, we believe it is unlikely the companies’ credit metrics will improve in 2009 to levels consistent with the previous rating,” she said. “Although the last decade for retailers has been characterized by revenue growth and consolidation, we now expect revenues and profitability in the auto retail marketplace to be more volatile, at least for the next year or so.”
AutoNation is America’s largest retailer of new and used vehicles. It employs about 25,000 people at 239 dealerships across 15 states and boasts nearly $18 billion in annual revenue. It made about $279 million last year.
The Penske Automotive Group is the second-largest publicly traded dealer consortium. With 160 franchises in the United States and 147 internationally, Penske employs more than 15,000 people and had nearly $13 billion in revenue last year. The company, which is owned by Detroit racing legend and tycoon Roger Penske, made about $128 million in 2007.
U.S. light vehicle sales are down more than 16 percent this year, with November sales translating into a seasonally adjusted annual rate of just 10.18 million units. Standard & Poor’s expects 2009 new vehicle sales to drop 15 percent, to 11.1 million units “at best.” It said that, in the long run, major players like AutoNation and Penske could benefit from dealer consolidation, but are unlikely to reap significant benefits from those efforts in the near term.
Standard & Poor’s warned that it could lower both companies’ ratings even more if they fail to cut back on their debt, urging them to use any free cash for that purpose, rather than for acquisitions. It also cautioned that a bankruptcy filing by one of Detroit’s automakers would prompt another ratings review.