S&P's Rating of GM Debt Sinks Deeper Into Junk

NEW YORK – Standard & Poor's Monday cut its ratings on General Motors Corp. (GM) deeper into junk territory and warned that the world's largest automaker may have to restructure its debt if recent trends persist.

The downgrade puts GM's ratings deep into the speculative class, a sign of growing risk that GM may have trouble paying back all of its debt.

Ratings on GM's finance arm, General Motors Acceptance Corp. , were not changed but remain on review with "developing" implications, meaning the direction of the rating is uncertain.

The developing status reflects the possibility that GM may sell a controlling stake in GMAC to a highly rated financial institution, S&P said.

GM has lost nearly $4 billion this year as it battles high health care and commodity costs, eroding U.S. market share and slumping sales of its once-profitable sport utility vehicles.

Consolidated debt outstanding was $285 billion on Sept. 30, S&P said.

"The changes that will have to occur to turn this company around to cause it to be a profitable auto manufacturer are huge," said Dan Zaldivar, fixed income analyst at RBC Capital Markets in Chicago. "This is a very big ship and it turns very, very slowly."

S&P cut GM's corporate credit rating by two notches to "B," five steps below investment grade, from "BB-minus." The outlook is negative, meaning the rating is likely to be lowered again over the next two years. S&P's rating on GM is the lowest of the three major rating agencies.

"This year has witnessed a stunning collapse of GM's financial performance compared with 2004 and initial expectations for 2005," S&P said.

Net losses at North American operations could reach $5 billion for the year, even before substantial impairment and restructuring charges, the rating agency said.

An industrywide falloff in demand for sport utility vehicles makes it doubtful that GM's new models can help restore its North American operations to profitability, S&P added.

S&P's downgrade came on the same day that bids are due to buy a controlling stake of GMAC as GM tries to restore the unit's investment-grade ratings. Borrowing costs at GM and its financial unit have soared since they were first cut to junk in May.

GM's bonds with an 8.375 percent coupon due in 2033 fell to 72.2 cents on the dollar from 73.25 cents on Friday, according to MarketAxess. Its shares fell 10 cents or 0.44 percent to $22.82.