General Motors Debt Rating Cut Further into Junk

Two major rating agencies cut General Motors Corp.'s (GM) debt rating deeper into junk territory on Tuesday after the automaker said it was offering banks collateral to renew a credit facility.

GM said earlier in the day that it plans to amend and extend a $5.6 billion unsecured revolving credit facility, offering lenders collateral, better pricing and other enhancements in return for extending the maturity of the revolving facility to 2011.

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The automaker disclosed earlier this year that access to its credit facility could be threatened because of its restatement of financial results. Rating agencies had placed GM's debt on review for downgrade at the time because of concerns the automaker would have to offer collateral to bank lenders, leaving fewer assets for bondholders in the event of a bankruptcy.

GM, which lost $10.6 billion in 2005, is cutting 30,000 jobs and closing 12 plants as part of a broad restructuring effort. It is also offering early retirement incentives to more than 125,000 factory workers, including about 13,000 at its bankrupt former parts subsidiary, Delphi Corp.

GM also plans to split in half the cost of additional buyout offers at Delphi.

The rating downgrades were not a surprise, said BNP Paribas senior credit analyst Brad Rubin, and GM's bonds moved only slightly on the news.

Standard & Poor's cut GM's senior unsecured debt rating to "B-minus," the sixth-highest junk rating, from "B" and said it may cut the rating again. The bank loan was rated "B-plus," the fourth-highest junk rating.

S&P also released a recovery report on GM concluding that unsecured bondholders would likely recover 56 percent of par in the event of a GM bankruptcy.

Moody's Investors Service slashed GM's senior unsecured rating to a deeply speculative "Caa1," seven steps below investment grade, from "B3." The outlook is negative, meaning the rating may be cut again over the next 12 to 18 months.

Fitch affirmed GM's rating but said it was leaving it on review for a downgrade, citing an unresolved situation at Delphi. Fitch rates GM "B," the fifth-highest junk rating.

Delphi has asked a bankruptcy court to void its labor contracts if it cannot reach an agreement on pay and job cuts, while its union has authorized a strike in case the contracts are nullified.

"Wage and benefit programs for the remaining hourly work force have yet to be resolved, and Delphi has also not resolved its large underfunded pension position and faces a pending $1.1 billion required contribution," Fitch analyst Mark Oline said.

Analysts have said a strike at Delphi would shut down GM's North American production and force it to burn through billions of dollars a week.

GM's rating will likely remain under review for a downgrade until a new labor agreement is reached and ratified by Delphi's unions, Fitch said.

GM's 8.375 percent bonds due in 2033 dipped to 76.25 cents on the dollar, down from 76.56 cents on Monday, according to MarketAxess.

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