June 20 (Bloomberg) -- General Motors Corp., Ford Motor Co. and Chrysler LLC credit ratings may be lowered by Standard & Poor's as higher gas prices inflict ``financial damage'' on the auto industry.

S&P placed the carmakers' credit ratings, already five levels below investment grade, on CreditWatch negative, according to a statement today. New York-based S&P, a unit of McGraw-Hill Cos., said it may also downgrade their financing arms. While the carmakers will be able to pay their debts this year, their cash may shrink to ``undesirable levels'' by the end of 2009, S&P said.

``As we look forward, we do not see a lot of visibility on how bad things are going to get,'' S&P analyst Robert Schulz said in an interview on Bloomberg Television. ``We thought the best thing to do would be to stand back and look at these three companies and look at how the market could unfold.''

A weakening economy and soaring fuel prices are dragging U.S. auto sales to their lowest levels in 15 years. Ford, the second-biggest U.S. automaker behind GM, said today its losses will widen because sales of its large pickup trucks in the U.S. are plunging on $4-a-gallon gasoline. The Dearborn, Michigan- based automaker said its financing unit, Ford Motor Credit, will also have a loss.

Ford and GM shares dropped and the cost to protect against a default on their debt soared. Ford shares fell 51 cents, or 8 percent, to $5.81 in New York Stock Exchange composite trading. GM's shares declined $1, or 6.7 percent, to $13.79. Chrysler, based in Auburn Hills, Michigan, is owned by New York private equity firm Cerberus Capital Management LP.

Credit-Default Swaps

The cost to protect GM's debt rose to a record. Credit- default swap sellers demanded 27.5 percent upfront and 5 percent a year to protect GM debt from default for five years, according to CMA Datavision. That's up from 24 percent initially and 5 percent a year yesterday and means it would cost $2.73 million upfront and $500,000 annually to protect $10 million in debt.

The upfront payments for Ford contracts jumped 3.5 percentage points to 24.75 percent, the widest in more than three months, CMA prices show. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

Renewed Concerns

Moody's also changed its outlook on both Ford and Chrysler's B3 ratings to ``negative'' from ``stable'' today.

In the report, S&P's Schulz said he has renewed concerns about the companies' ``future cash outflows in light of the prospects for U.S. sales for the rest of 2008 and into 2009.''

``The erosion of demand for SUVs and pickups has been particularly troubling,'' Schulz said.

``The companies' difficulty in anticipating the pace of market deterioration was reflected today in Ford's announcement,'' Schulz said in the report. ``In addition to weak sales and adverse product mix shifts, the list of challenges also includes less receptive capital markets, higher costs for steel and other raw materials, lower residual values that hurt profitability at the finance units and reduce consumers' trade-in power, and increasing cash needs for restructuring efforts.''

Ford surprised analysts with a first quarter profit in April, and then last month abandoned its forecast for a full-year profit in 2009. Ford lost $2.7 billion last year and $12.6 billion the year before. Detroit-based GM reported $38.7 billion of losses last year after a $1.98 billion loss in 2006.

S&P rates all three automaker's debt B. For issuers rated B, ``adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment,'' according to S&P's ratings definitions.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: June 20, 2008 16:22 EDT