S&P Ratings on Automakers' Dire Situation

The rating agency on the possible outcomes for GM, Ford, and Chrysler after the Senate's rejection of bailout loans

Standard & Poor's Ratings Services said on Dec. 12 that, in light of the U.S. Senate's rejection last night of an emergency loan package for General Motors Corp. (GM) and Chrysler LLC, the risk of default by one or both of these companies over the next few months remains very high.

The Bush Administration on Dec. 12 said it will consider using funds earmarked for the financial industry stabilization package to support the U.S. automakers' near-term liquidity needs. The U.S. Treasury said it stands ready to prevent an imminent failure of the automakers. However, the Treasury has not yet indicated how the automakers can access the funding provided through the Troubled Asset Relief Program, or TARP.

It is also uncertain where TARP loans would stand in the automaker capital structure. Ford Motor Co. (F) is not currently seeking federal loans, primarily because it has a large unused bank facility. The current ratings on all three automakers already reflect their high default risk and are therefore not changed by the U.S. Senate vote on Dec. 12.

We apply ratings in the CCC category to companies that are highly likely to default on a debt payment and that depend on multiple factors beyond their control to meet their financial commitments. The CC rating on GM reflects these risks, as well as the company's stated intention that it will seek to reduce its current debt burden by more than half as it attempts to reduce cash outflows and win support for the U.S. government-backed loans. 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.

In our view, the catalyst for a GM or Chrysler bankruptcy in the very near term is unchanged: liquidity dropping below the minimum levels needed to operate their capital-intensive vehicle manufacturing businesses. The automakers ordinarily make substantial payments to their suppliers early each month, and we believe the several billion dollars in outlays expected during the first few days of January 2009 could use up a substantial portion of both companies' respective cash balances, unless U.S. government support of some kind is forthcoming or the suppliers defer these payments. Consumer demand in the U.S. and other key markets has only worsened since these companies first said they might not have enough cash to support operations into early next year.

In addition, we believe concerns about bankruptcies have added to the declines in GM's and Chrysler's sales and therefore heightened their cash use.

We also remain concerned about the spillover effects of an automaker failure on the North American parts suppliers. Many important suppliers sell parts to more than one automaker, and as we have stated previously, if GM or Chrysler should file for bankruptcy, withhold payments to suppliers, or be forced to halt operations, the repercussions to the suppliers would be dramatic. We placed 15 suppliers on CreditWatch with negative implications on Nov. 13, 2008 as a result of their significant exposure to the Michigan-based automakers.

Ford's liquidity remains materially better than that of the other two Michigan-based automakers. However, if GM or Chrysler were to file for bankruptcy, Ford may have to use its liquidity to keep its supply base intact.

Our recovery ratings on U.S. automaker debt are based on the assumption of a bankruptcy filing, multi-year reorganization, and eventual emergence. These ratings are not affected by the developemnts on Dec. 11-12. Expected recovery prospects for secured and unsecured debtholders vary by automaker, largely reflecting the company-specific mix of secured and unsecured debt in the capital structure rather than vastly different fundamentals for each company.

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