Fitch Slaps Junk Rating on GM

DETROIT -- Citing declining sales of larger sport utility vehicles, Fitch Ratings on Tuesday became the second of the three major debt ratings agencies to cut its rating on General Motors to below investment grade.

The downgrade to junk status reflects Wall Street's increasingly dim view of GM's prospects and will prevent many large bond investors from buying bonds from GM, which has traditionally been one of the nation's largest bond issuers. Standard & Poor's downgraded GM –– as well as the Ford Motor Company –– to junk on May 5.

Fitch cited a number of factors in the downgrade, from rising health care costs to the strength of GM's competitors, such as Toyota. But the credit agency said the recent slump in larger SUV sales, a bulwark of GM's profitability until recently, was the biggest setback.

The agency put GM on a negative outlook and said its new rating of BB+, the highest junk bond rating, could be lowered further this year, particularly if the economy faltered.

In a statement, GM said it was "disappointed" by the action.

The company is pressing the United Auto Workers Union for cuts in health care benefits which cost GM more than $5 billion annually --though union leaders have said major concessions would not come before the expiration of GM's labor contract in 2007.

In the corporate bond market, the price of GM bonds fell only modestly after the news and was above recent lows. Several analysts said that they did not expect the fallout to be as serious as it was after S&P's downgrade of GM and Ford.

The effect of the downgrades on GM's borrowing costs has been minimal because the company has largely abandoned the corporate bond market and is using other avenues to raise funds.

But the move by Fitch was significant because of recent rule changes by Lehman Brothers. Currently, Lehman's rules drop a company from its investment grade corporate bond index if it is cut to junk by either S&P or Moody's Investors Service. But as of July 1, dropping a company will require a downgrade to junk by at least two credit agencies, including Fitch.

Before Fitch's action on Tuesday, GM would have been removed from the investment grade index on June 1 and then returned on July 1 when the new rules took effect. Now, though, GM will be the biggest high-yield credit by far in the Lehman indexes.

Tuesday's move by Fitch underscores that although both GM and Ford are seen as being in tough shape, many analysts appear to feel that Ford's outlook is somewhat brighter.

Fitch said last week that it was unlikely to cut Ford to junk anytime this year, and reiterated on Tuesday that it had a more positive view on Ford, in part because the company has fewer retirees than GM and has a product lineup more suited to the current market.