General Motors Corp., the most indebted automaker with $200 billion in borrowings, had its credit rating lowered by Moody's Investors Service because increasing discounts are hurting profit and its ability to cover pension costs.
The long-term debt rating was cut to Baa1 from A3. The rating on debt sold by the General Motors Acceptance Corp. finance arm was lowered to A3 from A2.
General Motors' unfunded pension liability of $19 billion is the highest in the auto industry and its sales are falling faster than the market.
"It's the cumulative effect of slower than expected sales in May, the pension pressure and the continued competition," said Joe Robison, who helps manage $6 billion in debt, including General Motors bonds, for National City Bank. "This suggests lower sales going forward, less cash and less debt retirement."
With its sales down 6.1 percent so far this year, Detroit-based General Motors increased average incentives to a record $3,916 per vehicle last month, outspending DaimlerChrysler AG and Ford Motor Co. to win back customers. Sales of Asian carmakers such as Toyota Motor Corp., which have better quality rankings and lower rebates, are up 1 percent. GM's 10-year notes yield 6.2 percent, less than Ford Motor Co.'s 6.7 percent on similar debt. That gap has narrowed from about 1.6 percentage points three months ago, said Robert Truesdell of M&T Capital in Buffalo, N.Y.
The amount of debt at GM is equal to 60 percent of the total value of all goods and services produced within its home state of Michigan and is $80 billion more than Ford's $120 billion in long-term borrowings at the end of last year.
GM said this week that its $5-a-share profit goal for this year remains "threatened" by rising rebates.
Incentives offered by GM in May averaged $3,916 per car and truck compared with an industry average of $3,308, and $2,259 at Toyota Motor Corp., CNW Marketing Research said. General Motors' incentives in May 2002 averaged $2,733 per model.
The company faces rising pension costs because it has 2.5 retirees for every active employee, Moody's said. A lower credit rating means a company will have to pay more to raise money in the bond market.
Shares of General Motors fell 92 cents to $36.20 yesterday.
