S&P: Rough Road Ahead for GM, Ford, Chrysler

The rating agency put the three automakers on CreditWatch negative, citing deteriorating U.S. industry conditions

Standard & Poor's Ratings Services today said it is placing its corporate credit ratings on the three U.S. automakers, General Motors Corp. (GM), Ford Motor Co. (F), and Chrysler LLC, on CreditWatch with negative implications, citing the need to evaluate the financial damage being inflicted by deteriorating U.S. industry conditions--largely as a result of high gasoline prices. Included in the CreditWatch placement are the finance units Ford Motor Credit Co. and DaimlerChrysler Financial Services Americas LLC, as well as GM's 49%-owned finance affiliate GMAC LLC.

"We have renewed concerns about all three automakers' future cash outflows in light of the prospects for U.S. sales for the rest of 2008 and into 2009," said Standard & Poor's credit analyst Robert Schulz.

The erosion of demand for SUVs and pickups has been particularly troubling. Although these segments have been weak for some time, the exodus of demand that began in April, caused by escalating gas prices and consumer preferences for smaller vehicles, is gathering speed.

Despite concerted, and in some cases successful, efforts to bolster their line-ups of smaller vehicles and reduce costs, all three Michigan-based automakers still rely on light trucks for a disproportionate share of profitability and cash flow.

The companies' difficulty in anticipating the pace of market deterioration was reflected in Ford's June 20 announcement that it expects to use an even larger amount of cash this year and next than it announced previously, its second negative guidance revision in a month. Ford plans to use more than $16 billion of cash between 2007 and 2009 in its automotive operations, including the cost of employee separation programs, unless the economy rebounds next year.

The company also said this year's pretax results will be worse than last year's, announced further light-truck production cuts and shift reductions, and delayed this fall's launch of the F-150 pickup by two months to clear existing inventory.

Also worrisome is the dire state of the vehicle finance market. Ford said on June 20 it expects Ford Motor Credit to report a pretax loss for the year (before any infusion from Ford) caused by weak used (residual) values, primarily for light trucks.

Although GM and Chrysler have not publicly detailed their expectations for cash use, all of the factors behind Ford's weaker guidance also apply to the other U.S.-based automakers. 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.

We believe all three companies currently have ample liquidity for at least the rest of 2008 as measured by cash balances, available bank facilities, and in some cases unencumbered assets. But we now also believe deteriorating industry fundamentals could reduce liquidity to undesirable levels by the second half of 2009.

As part of our reviews, we will assess all three companies' strategies for addressing the weak sales and shifts in demand away from light trucks and maintaining liquidity at satisfactory levels through 2009.

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