Moody's Investors Service cut its ratings on Ford Motor Co. and General Motors Corp. to junk status on Wednesday, the latest blow to the automakers as they battle global competition and rising costs.
The downgrades reflect challenges the automakers face in trimming their high fixed costs to become competitive over the long term, Moody's said.
Ford and General Motors have been battling fierce competition from foreign automakers and have had to offer costly discounts as surging oil prices eat into demand for their high-profit sports utility vehicles.
"I think the worst is yet to come," said Peter Morici, business professor at the University of Maryland in College Park. "I expect their market share to continue to shrink and their balance sheets to become more troubled."
Ford's downgrade will cement its status as a junk-rated credit, hampering its access to funding as it prepares a restructuring plan to return its North American vehicle operations to profitability. Standard & Poor's had cut Ford's rating to junk in May.
The downgrade's impact will be somewhat limited, however, because Moody's kept an investment-grade rating on Ford's finance arm, which issues most of the company's debt.
Moody's was the last of the three major rating services to cut General Motors to junk status, following downgrades in May from Fitch Ratings and Standard & Poor's.
Moody's rating outlook on both automakers is negative, meaning that more downgrades are likely over the next 12 to 18 months.
Ford and General Motors are among the biggest issuers of debt in the United States, with well over $400 billion of combined debt as of June 30.
"Although the decision Moody's made today is disappointing, it doesn't shake our determination to achieve continued success as a global automaker," Don Leclair, Ford's chief financial officer, said in a statement.
Strong competition, soaring health care and raw material costs and a slide in U.S. market share have forced Ford to slash its profit forecast twice this year.
GM said it was working to address its cost issues.
"We are disappointed with Moody's actions because we are beginning to see signs of progress in product excellence and in a revitalized marketing strategy," said GM spokesman Jerry Dubrowski. "There is more work to be done in improving our cost position and health care burden and we are working as quickly as we can to address these issues."
Moody's cut Ford's senior unsecured ratings by one notch to "Ba1," the highest junk rating, from "Baa3." It cut the senior unsecured rating on Ford's finance arm, Ford Motor Credit by one notch to "Baa3," the lowest investment-grade rating, from "Baa2." The rating outlook for both companies is negative, meaning another rating cut is likely over the next 12 to 18 months.
Moody's cut GM's senior unsecured debt rating by two notches to "Ba2," the second-highest junk rating, from "Baa3." It cut the rating on General Motors Acceptance Corp. by two notches to "Ba1," the highest junk rating, from "Baa2." GMAC is GM's finance arm.
Ford Motor Credit's bonds with a 7 percent coupon due in 2013 fell to 97 cents on the dollar, down from 97.5 cents on Tuesday, according to MarketAxess.
GM's 8 percent bonds due in 2031 fell to 93-3/4 cents on the dollar from 94-1/2 cents on Tuesday.
