Thursday, Standard & Poor’s dropped its credit ratings for General Motors and Ford to “junk” status.
Both companies’ sales have suffered largely from high gasoline prices with GM’s domestic sales falling 5% and Ford’s dropping 4.2% from January to April.
“This is the beginning of the end of the U.S. auto industry as most people have come to know it,” says Egan-Jones Ratings managing director, Sean Egan. “In another two years, we’re likely to see substantial layoffs and bankruptcy filings by possibly one or both of these companies and massive restructurings of most of the U.S. auto manufacturers.”
As Reuters explains,
“With junk ratings, the automakers have fewer avenues for raising funds because many large institutional investors cannot buy speculative-grade debt.
Ratings below investment-grade imply a much higher chance of a company defaulting on its debt. But both companies have ample cash on their balance sheets, and said they were disappointed with the action.”
GM obviously wasn’t pleased with S&P’s rating downgrade, but the company said that GMAC, has sufficient funds for its operations “for the foreseeable future.”
GM and Ford both issued statements saying that they disagreed with S&P’s ratings. Both companies claim to have adequate cash and liquidity to sustain operations.
“Clearly, GM has many challenges in North America, but the company is moving aggressively to address these challenges,” said GM.
These new “junk” ratings may cause GM and Ford to have to face higher interest rates to get enough buyers for their bonds.
Chris is a staff writer for Murdok. Visit Murdok for the latest ebusiness news.
