Credit Agencies Balk at GM’s Plan, Cut Debt to Junk Status
Standard & Poor’s Ratings Services followed Moody’s Investors Service Thursday and downgraded General Motors’ credit rating to the lowest level of junk status, even as the automaker pleaded with Congress for an $18-billion emergency bailout.
The downgrades came as GM (NYSE:GM) said it would reduce its current debt, which would leave existing bondholders with catastrophic losses, according to S & P.
We believe the most likely scenario is that GM will offer to exchange some or all of its outstanding debt for equity or new debt at a steep discount to face value. Given GM’s weakening liquidity position, we consider such an offer to be a distressed exchange and,as such, is tantamount to a default.
GM CEO Rich Wagoner told the Senate Banking Committee that the company needs $4 billion this month and $4 billion in January just to stay afloat.
But even if Congress were to hand over the money tomorrow, investors should think twice about taking another chance on GM, said Gimme Credit’s Shelly Lombard in a research note:
GM’s plan has more execution risk and substantial uncertainty for bondholders. We have never liked Ford’s long-term prospects but the bonds have more potential for near-term upside…If the bailout looks likely, we’d move quickly to buy Ford bonds but we maintain our underperform on GM bonds.
CreditSights’ take on the situation in “Plans Roll In, Plot Thickens, Structural Risks Morph,” is that suppliers will keep getting their bills paid on time, leaving the UAW, bondholders, and shareholders in “the zero-sum game.”
CreditSights points out that the Chrysler bailout of 1979 shows that all stakeholders have to suffer in a properly structured deal so all win. If that doesn’t happen with GM, “it all could break down on a bondholder rebellion.”
Of course much of this becomes moot if GM files for bankruptcy protection, or arranges a pre-packaged bankruptcy, which Bloomberg LP reported as a possibility late Thursday, citing a person familiar with the matter.
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