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Still Think Ford, General Motors Can't Go Bust?: Mark Gilbert
May 6 (Bloomberg) -- Anyone who says it's unthinkable that either General Motors Corp. or Ford Motor Co. might seek Chapter 11 bankruptcy protection should call Francisco Landaez.
After working 24 years at Petroleos de Venezuela SA, Landaez lost his job and decided to put his savings in ``something secure.'' He invested about $280,000 in General Motors bonds and shares.
``I made an analysis about a year ago, asking myself what company is it almost impossible to see going bankrupt,'' Landaez, 50, said in a telephone interview from his home in Caracas. ``I decided to put my money into General Motors. When I looked at my account a month ago, it was down almost 30 percent.''
Landaez knows he's in for another nasty shock next time he checks his investment. Yesterday, Standard & Poor's analyst Scott Sprinzen slashed his credit rating of General Motors to junk with a two-step cut that puts the world's biggest automaker at BB. Nine minutes later, he whacked Ford to junk as well, with a BB+ grade.
For good measure, Sprinzen strapped a ``negative'' outlook to his assessments of both companies, meaning their ratings are more likely to decline further than recover.
Many investors aren't allowed to own securities with such low grades. And with GM's 8.375 percent bonds repayable in 2033 trading at about 74 cents on the dollar, while Ford's 7 percent 2013 notes are worth about 90.5 cents, anyone who hasn't already bailed out of the securities stands to lose a chunk of change.
Interesting Dilemma
Speaking of losing money, what was Kirk Kerkorian thinking when he offered earlier this week to buy 28 million GM shares at $31 each, adding to the 22 million shares he already owns via his Tracinda Corp. investment company?
General Motors stock has lost 70 percent of its value in the past five years.
The junk ratings pose an interesting dilemma for Lehman Brothers Inc., which says about 90 percent of institutional investors use its bond indexes to guide their investment decisions. Under the existing criteria, borrowers drop into the high-yield index, out of the investment-grade category, when either S&P or Moody's Investors Service judges them to be junk.
Starting July 1, however, the index rules change to include Fitch Ratings, taking the middle assessment. So provided the $375 billion of combined debt from Ford and General Motors doesn't get cut at Moody's or Fitch, investors face the unprecedented prospect of the bonds dropping out of the investment-grade indexes this week, only to leap straight back in again in less than two months.
Swift Collapse
The collapse in creditworthiness of the two biggest U.S. automakers has been swift. As recently as January, UBS AG's London- based credit analyst Juan Carrion was telling investors ``we do not see any negative rating action for either Ford or General Motors in 2005.''
It now costs about $865,000 per year to insure $10 million of GM debt for five years by using credit derivatives, up from about $213,000 at the start of the year. Insurance on Ford debt costs about $690,000, up from $173,000. The higher the cost of insurance, the less certain investors are that their debts will get repaid.
GM owes its bondholders about $113 billion, of which almost $15 billion falls due this year with an additional $27 billion scheduled for repayment next year. Bond investors have lent $97 billion to Ford, with $12 billion repayable this year and almost $20 billion in 2006.
Where the Buck Stops
S&P highlighted its concern that both companies are too reliant on sport utility vehicles, which are likely to be less profitable in coming years. And while Sprinzen said in a television interview he's ``not pointing to management,'' chief executives Rick Wagoner at GM and William Clay Ford Jr. at Ford should be thinking about handing back the keys to the chief executive suites.
``The downgrade to non-investment grade reflects our conclusion that management's strategies may be ineffective in addressing GM's competitive advantages,'' S&P said in the statement explaining its rating cut. On Ford, the rating company said there's ``skepticism about whether management's strategies will be sufficient to counteract mounting competitive challenges.'' In other words, the guys in charge aren't able to fix the problems.
``We will take whatever measures are necessary, and we will succeed,'' Ford Jr. wrote in a letter to his employees yesterday, following the rating cuts.
Too Big to Fail?
Unfortunately, those measures may have to include seeking bankruptcy protection from creditors while Ford and GM come up with reorganization plans to address falling market share and crippling health care and pension costs. If it's good enough for the airline companies, there's no reason to rule it out for the automakers. There's no such thing as ``too big to fail,'' however tragic bankruptcy would be.
Landaez in Caracas says he has decided to stick with his GM investment for now, figuring that it's not worth taking the hit and praying that General Motors doesn't go bankrupt before it repays his bonds, which come due in 2014.
``It's pretty scary,'' says Landaez. ``The bottom line is, there's nothing secure in this world any more.''
To contact the writer of this column:
Mark Gilbert in London at
[email protected].
Last Updated: May 5, 2005 19:20 EDT
