Car giants' credit in junk bin

NEW YORK - General Motors and Ford, the two biggest US vehicle makers, have had their credit ratings cut to junk-bond status by Standard & Poor's, slashing the value of US$375 billion ($510 million) in debt and causing their shares to drop.

Investors have dreaded a GM cut to junk for fear it may cause turmoil in both the high-grade and junk markets. Investment funds ineligible to hold junk bonds could be forced to sell billions of dollars of GM debt.

S&P cut GM two levels to BB from BBB- yesterday. Ford was lowered one level to BB+ from BBB-. The car makers may be unable to address "competitive disadvantages" such as their reliance on sport-utility vehicles, S&P said.

GM and Ford are losing market share to Asian rivals, including Toyota, and struggling to control soaring retirement and healthcare costs. They are the biggest companies to have their credit lowered to high-yield, high-risk ratings, exceeding WorldCom in 2002 and dealing a blow to insurers and pension funds that hold their debt.

"This is an unprecedented earthquake" in the corporate bond market, said Pete Hastings, a vice-president of fixed-income at Morgan Keegan in Memphis, Tennessee.

Billionaire investor Kirk Kerkorian, who shook up Chrysler a decade ago with a failed takeover attempt, this week said he planned to double a previously undisclosed stake in GM to 8.8 per cent.

Detroit-based GM's share of the US vehicle market was 25.6 per cent in the first four months, according to Autodata an 80-year low and down from 27.3 per cent in the same period of 2004.

Ford's share fell to 19.2 per cent from 20.3 per cent. Toyota rose to 13.3 per cent from 11.8 per cent.

The cuts rattled financial markets. The Dow Jones Industrial Average, which was little changed when S&P announced the GM downgrade at 12:38pm New York time, fell more than 80 points within 30 minutes. Treasuries rose as investors sought a haven.

GM shares fell about 6 per cent, or US$1.94, to US$30.86 on the New York Stock Exchange. Ford shares dropped more than 4 per cent, or 46USc, to US$9.70.

- BLOOMBERG, REUTERS