Moody's Lowers GM Ratings for Second Time This Year
ALAN L. ADLER
Nov. 25, 1992
DETROIT (AP) _ Moody's Investors Service Inc. lowered its rating on General Motors Corp. debt Tuesday in a decision that could hurt the struggling automaker's ability to borrow money.
The New York-based debt rating agency said it downgraded the securities of GM; its financing arm, General Motors Acceptance Corp.; and another subsidiary, GM Hughes Electronics Corp.
Moody's said the downgrade reflects the deterioration of GM's North America operations, which lost about $12 billion in 1990-1991 and is expected by some analysts to lose $3 billion to $4 billion this year.
The agency said it expects GM will need several years to realize the benefits of cost-cutting moves it is making now.
''Consequently, Moody's believes that GM's core North American auto operations are likely to remain a cash user during the intermediate term,'' Moody's said in a statement.
The downgrades, the second by Moody's this year on about $70 billion in GM debt, were largely expected on Wall Street.
But they came at an inopportune time for GM, which indicated Tuesday it would begin selling $1.15 billion in preferred stock that it registered with the Securities and Exchange Commission on Nov. 11. The downgrade likely means GM will have to pay greater interest to purchasers of the preferred stock.
Standard & Poor's Corp., another major debt rating agency, and other smaller agencies have GM debt under review for possible downgrade. S&P analyst Scott Sprinzen said his agency's review could last another couple of months.
''It's an inconvenience more than it is a disaster,'' said David Healy, an auto industry analyst with S.G. Warburg & Co. in New York. ''I think the market had already downgraded GM's paper long before the agencies did.''
Among the classifications of debt that Moody's downgraded was commercial paper of GMAC and Hughes, from Prime 1 to Prime 2. Commercial paper is a form of corporate IOU.
The drop, from the top rating tier, will restrict the access of the two GM subsidiaries to short-term borrowing. Many money market funds are restricted from making commercial paper loans to companies whose rating is below Prime 1.
In preparation for such a downgrade, GMAC last week told GM's 9,100 dealers that it would stop lending money to finance non-GM dealerships after Jan. 1. GMAC will halt loans for non-GM new cars next March 1.
In a positive vein, Moody's noted that these moves will allow the company to reduce the amount of its receivables, thereby lowering borrowing requirements.
The GMAC moves will cut about 10 percent, or $6 billion, of its $60 billion in North American business, GMAC spokesman Terrence P. Sullivan has said.
Moody's affirmed the Prime 1 commercial paper rating for EDS Corp., the computer services business GM bought from Ross Perot in 1984. Moody's said EDS continues to increase the portion of its business unrelated to GM and is in a position for intermediate gains in earnings and cash flow.
GM Chief Financial Officer G. Richard Wagoner had an upbeat response to the Moody's decision.
''North American Operations financial results have improved significantly in the first nine months of 1992, and GM has set an aggressive - but achievable - goal of break-even earnings before interest and taxes in 1993.''
Michael Mulvaney, a Moody's assistant vice president, said the agency is impressed by GM's plan to correct its problems in North America.
''But that plan has to be put into place, and there are some risks along the way,'' he said.